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EQUITY RESEARCH March 6, 2024 Earnings Update
CENOVUS ENERGY INC.
2024 Investor Day Takeaways
Our Conclusion
Cenovus hosted its investor day on March 5. The presentation highlighted
further details on its longer-term production growth, plans to improve
reliability and drive cost structure lower on its assets. There was a continued
focus on balancing debt reduction and shareholder returns in the near-term
with line-of-sight to the $4 billion net debt target later this year. Given the
recent strength in both crack spreads and commodity price, we expect the
company to achieve its net debt floor in mid-Q3/24.
Key Takeaways
• Oil sands optimization and West White Rose drive significant
production growth. The company highlighted 150 MBoe/d of production
growth by 2028 to ~950 MBoe/d. Growth is to be primarily driven by oil
sands including Foster Creek optimization, Narrows Lake tie-back,
Sunrise optimization, and investment in the conventional heavy oil
business. West White Rose spending continues over the next three
years, but we see these major capital projects flipping over to generating
free cash flow in the 2026 time frame.
• Downstream reliability remains a focus. Cenovus is fixated on running
its operated downstream assets at a higher utilization rate. Despite a
rocky start-up of Superior and a challenging crack spread environment to
start the year, we are encouraged by commentary of the detailed work in
applying Cenovus best practices on existing facilities and operations.
While we appreciate investor confidence in achieving consistently higher
downstream utilization could take time to materialize, we have a high
degree of confidence in facility uptime and margin improvements given
the significant focus. This could translate into a more consistent and
stronger downstream free cash flow.
• Capital allocation and leverage targets. Cenovus continues to focus
on a conservative $4 billion net debt target. Once the highly anticipated
net debt floor is achieved, Cenovus plans to return 100% of excess free
funds flow to shareholders likely through a buyback. We suspect the
share price will need to be significantly higher than current levels for
investors to see a variable (special) dividend.
• Dividend capacity (and base dividend growth). Looking forward, the
company highlighted dividend capacity increasing to $2 billion in 2028
given the production growth, asset optimization and margin expansion.
This suggests the potential to double the current base dividend over that
time frame. We also believe there is further upside to this capacity as the
company repurchases stock over the next five years. We expect a
double-digit dividend increase in the April timing alongside Q1/24 results.
• Valuation. Cenovus trades at a P/RNAV ratio of 89%, a 2024E
EV/DACF of 4.6x and a 2024E FCF yield of 13% vs. the large-cap group
at 103%, 6.4x and 12%, respectively.