More Details Citing an “expectation of improving operational performance, the upcoming step-change in shareholder returns, and attractive valuation,” Scotia Capital analyst Jason Bouvier upgraded Cenovus Energy Inc. to “sector outperform” from “sector perform” on Wednesday.
“With both the upstream and downstream running at more normalized rates we believe Q3 will act as a good indicator of the true cash flow capability of CVE,” he said in a research report. “We believe strong execution in H2, coupled with robust oil prices will act as a catalyst for additional share price upside. On strip, we expect CVE to reach its $4-billion net debt target in Q1/24, which will result in 100 per cent of the company’s free cash flow being used for shareholder returns (compared to 50 per cent currently).”
Mr. Bouvier expects Cenovus’ Toledo and Superior refineries to be fully ramped-up in the second half of the year, which he thinks will lead improved downstream performance as seen by higher utilization and throughputs. He’s projecting downstream utilization to increase to 90 per cent from 67 per cent in the first half of the year.
He’s also expecting “steady” upstream growth, noting: “We model production growing from 780 mboe/d [thousand barrels of oil equivalent per day] in 2023 to 940 mboe/d by 2028 (4-per-cent CAGR [compound annual growth rate], leading the Cdn large cap space. The completion of the West White Rose project in 2026 will add 45 mbbl/d at peak production rates. Further, management has indicated that the Narrows Lake tie-back, debottlenecking at Foster Creek, and optimization at Sunrise could add 65-80 mbbl/d. This is in addition to modest growth from its conventional business.”
Seeing “torque to strong oil prices” and a “compelling” valuation, Mr. Bouvier raised his target for Cenovus shares to $30 from $28. The average target on the Street is $30.25, according to Refinitiv data.
“We estimate significant FCF at current commodity price levels backed by a strong balance sheet and a deep inventory of profitable optimization opportunities,” he concluded. “With several growth initiatives underway we expect total production to grow to 950 mboe/d over the next several years. Downstream throughput has increased with an acquisition and re-build of Superior. Over time we expect utilization and margin capture to improve, and believe there is potential for further optimization.”