May 1, 2024
Cenovus Energy Inc. Dividend Bump Reflects Confidence
Our view: Our constructive stance towards Cenovus reflects its capable leadership team, strengthened balance sheet, improving downstream operating performance and rising shareholder returns on the horizon. The company expects to achieve its $4.0 billion net debt target sometime this summer that will unlock 100% shareholder returns. We are maintaining an Outperform recommendation on Cenovus and raising our one-year target price by $1 (3%) to $33 per share.
Key points:
Cenovus’ first-quarter results were characterized by solid operating momentum, handsome shareholder returns and further net debt reduction. The company delivered in-line production of 800,900 boe/d amid higher downstream margins of $560 million. Cenovus also announced a 29% increase to its base dividend to an annualized rate of $0.72 per share (2.5% yield) alongside a variable dividend of $0.135 per share.
Net Debt Target. Achieving its $4.0 billion net debt target remains a big priority for Cenovus this year. The company’s net debt (company definition) fell $233 million sequentially to stand at approximately $4.83 billion as of March 31. Under our base outlook and futures pricing, we anticipate that Cenovus could achieve its $4.0 billion net debt target in the third-quarter of 2024.
Modified Shareholder Return Framework. Cenovus modified its shareholder returns framework as follows: (1) If Cenovus’ net debt rises above its $4.0 billion target in a given quarter (following the achievement of its target), the company will deduct the amount by which the previous quarter’s net debt exceeded $4.0 billion from the 100% payout of free funds flow, (2) If the previous quarter’s net debt is below $4.0 billion, Cenovus will aim to return 100% of free funds flow to shareholders.
TMX Update. TMX received regulatory approval for final permits and should move into service shortly. Cenovus is set to deliver about 1.3 million barrels of line fill to TMX this month, and expects to make sales in the second-quarter.
Free Cash Flow. We peg Cenovus’ free cash flow at approximately $5.9 billion in 2024 under our base outlook and $5.7 billion under current futures prices.
Relative Valuation. At current levels and under our base outlook, Cenovus is trading at a 2024 debt-adjusted cash flow multiple of 4.8x (vs. our global major peer group avg. of 6.2x), and a free cash flow yield of 12% (vs. our peer group at 8%). In our minds, Cenovus should trade at an average/ modest discount multiple vis-a-vis our global peer group, reflective of its capable leadership team, strengthened balance sheet, mixed downstream operating performance and rising shareholder returns on the horizon.