Cenovus Energy Inc T.CVE.WT

TD 2

[retiredcf]

Cenovus Energy Inc.

(CVE-T, CVE-N) C$24.41 | US$18.46

Q2/23 Conference Call Highlights and Updated Estimates

Event

Updated estimates following Q2/23 call (highlights below). Initial thoughts here.

Impact: NEUTRAL

 Start-up of Superior FCC (gasoline-producing unit) considered imminent: Management indicated that FCC start-up has presented challenges, but nothing that is considered systemic. The unit is now days away from introducing feedstock.  At a higher-level, total downstream throughput is currently ~690-700mbbl/d

(~93% utilization) with almost all assets online (with the sole exception of the Superior FCC). In our view, this sets the stage for much stronger downstream performance effectively starting immediately, and into Q4/23 (especially given the recent rally in crack spreads).

• Management maintaining bias to buybacks over variable dividends: As a reminder, CVE tests the relative economics of share repurchases at mid-cycle US $60/bbl WTI. It reiterated that it still prefers buybacks since it continues to see a material disconnect between its NAV estimate and share price. Until this tightens, variable dividends could take a back-seat—note that CVE has only announced one back in Q3/22. We nonetheless model a small variable dividend beginning this quarter.

• No reason to expect near-term changes to remaining non-operated JV's: While we, at one time, believed CVE might have been close to unwinding or unlocking value within its remaining PSX-operated JV's (like it did with BP), for now, it appears content with owning the assets in their current form. However, CVE did reiterate that it stands by its long-term objective of having strategic and operational control over all 'core assets'. While we continue to see restructuring potential, for the time being, this remains on the back-burner, in our view.

  TD Investment Conclusion

  While this was an unusually tough quarter for CVE, the fundamental outlook, for downstream in particular, appears much improved effectively immediately. While we have seen a deceleration of value-enhancing activity within the HSE portfolio (i.e., it has tapped most of the low hanging fruit), these opportunities still exist in abundance, in our view. Transitioning to a 100% return of excess FFF in Q1/24 (our estimate on strip) from 50% should also serve to put CVE on a very competitive footing, in our view. Our $29/share target price remains unchanged.