Cenovus Energy Inc T.CVE.WT

RBC

[retiredcf]

April 26, 2023

Cenovus Energy Inc.
1Q First Glance—Rolling with the Punches

TSX: CVE | CAD 23.17 | Outperform | Price Target CAD 29.00

Sentiment: Neutral

From where we sit, Cenovus Energy’s mixed first-quarter results are not indicative of the company’s execution capability—which should surface in the second half of this year. The company reported modestly lower AFFO/share and in-line capital spending and upstream production volumes vs. consensus. Cenovus’ net debt (company definition) stood at $6.6 billion as of March 31, and is expected to fall below the $4 billion mark in the fourth quarter assuming current commodity prices. Cenovus trimmed its upstream and downstream guidance (see below).

The company also raised its base dividend by 33% to a quarterly rate of $0.14/share ($0.105/share previously)—exceeding the 14% increase we had factored into our outlook.

Conference Call

• Time: 11:00 am ET on Wednesday, April 26 • Dial-In: [phone]

Key Points

• Cenovus generated $294 million of free funds flow (before dividends) in the quarter with its net debt up around $2.3 billion to $6.6 billion (driven by $1.6 billion in negative working capital adjustments, including $1.2 billion in cash taxes payable).

• The company’s ultimate net debt target of $4.0 billion is expected to be reached in the fourth quarter of this year—opening the door to 100% of excess free cash flow returned to shareholders.

• Christina Lake production came in at 237,200 bbl/d (vs. RBC at 239,700 bbl/d), while Foster Creek production came in at 190,000 bbl/d (vs. RBC at 187,500 bbl/d).

• The company built 12,500 bbl/d of upstream inventories in the first quarter.

• Refining margin (US + Canadian manufacturing) of $391 million (including a $255 million expense related to processing crude

  purchased in prior periods at higher prices and inventory adjustments vs. RBC at $200 million) came in head and shoulders above our $25 million estimate. This reflected Canadian manufacturing margins of $263 million in the first quarter and $128 million in the US Manufacturing segment, reflective of the impact of higher operating costs at the Superior refinery associated with the continued commissioning of the facility, and the full ownership of Toledo refinery given the company’s acquisition of the remaining 50% wi.

  • Cenovus reported a cash tax expense of $327 million in the first quarter, well above the $81 million factored into our estimate ($0.13 per share impact).

  Downstream Update

  • Following impacts from a severe winter storm in late December, the Lima refinery quickly returned to full rates—achieving utilization rates of 94% in the first quarter.

  • The Superior Refinery began to introduce crude oil in mid-March, remaining on track to fully ramp-up in the second quarter.

  • The acquisition of the Toledo refinery closed on February 28, with its smaller 30,000 bbl/d crude oil unit restarting in April. The larger 120,000 bbl/d unit is expected to restart in May and ramp-up to full rates throughout the second quarter.

  • Following cold weather impacts and an incident in December at the Wood River refinery, utilization rates returned to normalized rates in the first quarter. Gross margins at Wood River were negatively impacted in the first quarter due to significant costs associated with fulfilling contractual obligations for finished products.

  • The first phase of Wood River’s planned turnaround was completed in early April, with the second phase expected to be completed in the second quarter.

    Guidance Update

    • Cenovus’ updated corporate guidance includes total production volumes of 790,000 – 810,000 boe/d (down 2.4% from 800,000 – 840,000 boe/d previously at the midpoint), which includes a reduction of 10,000 bbl/d from the Atlantic production range reflecting the removal of Terra Nova volumes amid ongoing maintenance of the FPSO vessel.

  • The company now anticipates throughput of 480,000 – 500,000 bbl/d (down 7.5% from 510,000 – 550,000 bbl/d at the midpoint) in its US manufacturing segment, reflecting lower throughput year-to-date at Cenovus’ non-operated refineries due to unplanned outages in the first quarter as well as a longer than anticipated ramp up period at Toledo. As a result, guidance for US manufacturing unit operating expense has increased by $1.00/bbl to a midpoint of range of $13.25/bbl.

  • Cenovus decreased its cash tax expense guidance to $1.3 – $1.6 billion (down from 1.5 – $1.8 billion previously).

  • Oil sands operating costs decreased by approximately $1.00/bbl to a range of $11.50 – $13.00/bbl, reflective of lower natural gas price assumptions.