Have a $30.00 target. GLTA
EQUITY RESEARCH
Marketing Highlights Our Conclusion
We recently hosted Cenovus Energy’s management for a series of marketing
meetings, following the company’s Investor Day. We believe upside to the
share price is contingent on the company’s ability to show improvements in
U.S. downstream performance, the achievement of its $4 billion net debt
target and strong execution on its major capital projects. We highlight the
following topics which were the focus of the conversations.
Key Points
• The path forward on U.S. Refining. We highlight a consistent theme
and the majority of discussions in the meetings centered on downstream
utilization and throughput. We left the meetings with a feeling that the
appropriate personnel were in place to tackle both the operational
improvements and the ability to optimize margin capture from the
commercial side of the business.
• Lowering outstanding leverage. Cenovus is continuing to lower
outstanding leverage towards its net debt floor of $4 billion. We expect
progress to be made in Q1/24, but that one-time items including line fill
on TMX, year-end compensation, and the QTD strength in crude (driving
working capital adjustments) could moderate the pace of deleveraging.
This could also flip to a tailwind in Q2 as inventory is drawn down at
Superior and the asphalt market picks up for summer paving season.
• Inflection point of free cash flow generation. Cenovus is completing
several major capital projects that wind down in 2026; following that, we
anticipate a reduction in capex and bringing production online. This could
drive a significant rate-of-change in free cash flow generation. While the
longer-term capital spending outlook shrinks towards sustaining capital
of ~$3.5 billion per year, we suspect short-cycle opportunities like the
Lloyd Conventional Heavy could be layered in.
• Free cash return to shareholders. Cenovus is currently allocating 50%
of free cash flow towards debt repayment. We expect excess free cash
flow allocated to shareholder returns will be used to buy back stock
balanced with a consistently growing dividend. At its investor day, the
company highlighted $2 billion of dividend capacity in 2028 (double
current total dividend outlay of $1 billion annualized), but we expect the
per-share capacity could expand more significantly as the company
repurchases stock over the next five years (implying up to 25% dividend
CAGR on strip vs. 13% without buybacks).
• Valuation. Cenovus trades at a P/RNAV ratio of 80%, a 2024E
EV/DACF of 4.6x and a 2024E FCF yield of 13% vs. the large-cap group
at 103%, 5.4x and 12%, respectively.