TSX:CVE - Post Discussion
Post by
retiredcf on Apr 27, 2023 10:24am
RBC Report
Their upside scenario target is $33.00. GLTA
April 26, 2023
Cenovus Energy Inc.
The Other Side of the Mountain
Our view: There is plenty of torque in Cenovus’ US refinery segment to drive cash flow but igniting it will require smooth execution across the board. The good news is that the company’s magic $4 billion net debt floor target should be achieved in the fourth-quarter—which opens the door to 100% shareholder returns on the other side of the mountain. We are maintaining an Outperform recommendation on Cenovus, but trimming our one-year target price by $1 (3%) to $28 per share on the back of lower estimates.
Key points:
Outperform
TSX: CVE; CAD 22.32; NYSE: CVE
Price Target CAD 28.00 ↓ 29.00
1Q Results. The first-quarter was punctuated by substantially higher downstream margins of $391 million that were off-set by higher cash tax *Implied Total Returns expenses of $327 million. The company also boosted its base dividend by 33% to an annualized rate of $0.56 per common share (2.5% yield).
Net Debt Target. Cenovus’ net debt (company definition) rose $2.3 billion sequentially (in part due to $1.6 billion of negative working capital adjustments, including $1.2 billion in cash taxes payable) to stand at approximately $6.6 billion as of March 31. Cenovus now anticipates reaching its $4 billion net debt floor in the fourth-quarter of 2023 at current commodity prices, which would trigger 100% payout of excess quarterly free cash flow to shareholder returns. This is consistent with our updated 2023 outlook under both our base and futures commodity prices.
Guidance Update. The company’s updated 2023 outlook pointed toward 2% (20,000 boe/d) lower production of 790,000-810,000 boe/d amid an unchanged capital program of $4.0-$4.5 billion. The company now pegs its downstream throughput rates at 480,000-500,000 bbl/d (down 7.5%) in its US manufacturing segment.
Free Cash Flow. We peg Cenovus’ free cash flow (before working capital movements, base dividends and including A&D) at approximately $6.1 billion in 2023 under our base outlook (US$84 WTI, US$18.19 WCS-WTI, US $29 NYH 3-2-1). Under 2023 futures pricing (US$77 WTI, US$17.46 WCS- WTI, US$29 NYH 3-2-1), we peg the company’s free cash flow at $4.8 billion.
Relative Valuation. At current levels, Cenovus is trading at a 2023 debt- adjusted cash flow multiple of 3.8x (vs. our Canadian major peer group avg. of 4.6x), and a free cash flow yield of 16% (vs. our peer group at 17%). In our minds, Cenovus should trade at an average/above average multiple vis-a- vis our peer group, reflective of its capable leadership team, strengthened balance sheet, operating performance and bolstered shareholder returns, partially off-set by its still fractionalized downstream portfolio.
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