Cenovus Energy Inc. Update with Jon McKenzie
Our view: Our constructive stance toward Cenovus reflects its capable leadership team, strengthened balance sheet, stern capital discipline, and bolstered shareholder returns. The missing ingredient in the mix has been operating momentum, but this should surface in the second half of this year. We maintain our Outperform recommendation on Cenovus and our one-year price target of $28 per share.
Key points:
Our recent update with Cenovus Energy’s President and CEO, Jon McKenzie, was instructional, as usual, and delved into the company’s downstream operations. The good news is that Cenovus’s US refineries are establishing improved operating momentum, which should manifest itself in its third and fourth quarter results. The company also reaffirmed its expectation of achieving its $4 billion net debt floor by the end of 2023 (under prevailing commodity prices).
Downstream Update. Cenovus’s progress in ramping up its US refinery operations remains an important element in terms of achieving its net debt target, in part because its downstream utilization rate should rise as the year unfolds. At Toledo, the east side of the plant was brought up in April, with the west side of the refinery expected to be fully running in June. The crude unit at Cenovus’s Superior refinery came online in April, with ramp- up progressing on a unit-by-unit basis and a full restart expected later in the second quarter. The company’s Lima refinery continues to run well at rates proximate to nameplate capacity.
Upstream. Cenovus’s Lloydminster thermal operations have moved back above 100,000 bbl/d of heavy oil production. This uptick reflects continued stimulation/optimization work to help offset decline rates that were higher than anticipated.
Alberta Wildfires. Cenovus indicated that about one-half of the 85,000 boe/d (mainly dry gas) of production shut-in at Rainbow Lake, Kaybob- Edson, Elmworth-Wapiti, and Clearwater due to Alberta’s recent wildfires (mainly in the province’s northwest region) is back on-stream. There is no material damage to any of the company’s facilities or properties; however, there are some utility issues (e.g., burnt powerlines) in the impacted areas which are being fixed. Cenovus’s oil sands operations at Foster Creek- Christina Lake and elsewhere remain unaffected.
Relative Valuation. At current levels, CVE is trading at a 2023E debt- adjusted cash flow multiple of 3.9x (vs. our global major peer group avg. of 4.6x) and a free cash flow yield of 16% (vs. our peer group at 13%) under our base outlook. We believe CVE should trade at an average/above-average multiple vis-a-vis our peer group, reflective of the company’s capable leadership team, strengthened balance sheet, and bolstered shareholder returns, partially offset by its still fractionalized downstream portfolio.