Cenovus Energy Inc. Update with Jon McKenzie
Our view: Our bullish 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 company’s third-quarter results. We maintain our Outperform recommendation and one-year price target of $30 per share on CVE.
Key points:
Our recent update with Cenovus Energy’s President and CEO, Jon McKenzie, and SVP, Investor Relations, Jason Abbate, was upbeat and dug into the company’s operations. The good news is that most of Cenovus’s US refineries established much improved operating momentum in the third quarter, which should translate into more robust downstream results, especially given the strength in crack spreads in the third quarter.
Net Debt Target. Inclusive of some inventory builds and various working capital movements, Cenovus anticipates that it should achieve its $4 billion net debt floor by early 2024 (under prevailing commodity prices). This is consistent with our analysis under both our base and futures commodity prices.
Downstream Update. Cenovus’s progress in ramping up its US refinery operations remains an important element of achieving its net debt target and indirectly its relative multiple. At Toledo, the return to design rates has gone according to plan, with the facility resuming normal operating rates for the entirety of the third quarter. At Superior, the crude unit ran reasonably well in the third quarter; however, the fluid catalytic cracker unit has not performed as reliably as Cenovus would like. The company hopes to resolve this dynamic in the coming weeks.
3Q Preview. Our third-quarter outlook for Cenovus factors in equivalent production of 787,600 boe/d, including Christina Lake volumes of 236,600 bbl/d and Foster Creek production of 185,000 bbl/d. In the downstream, we anticipate Canada + US refining (pre-tax) operating cash flow of $815 million (inclusive of an approximately $75 million positive FIFO inventory adjustment in the US). All said, we peg Cenovus’s third-quarter cash flow at $3.2 billion ($1.68 per share) and free cash flow at $2.1 billion (before estimated dividends of $264 million and working capital movements).
Relative Valuation. Under futures pricing, Cenovus is trading at a debt- adjusted cash flow multiple of 5.8x in 2023E (vs. our global major peer group avg. of 5.5x) and 4.7x in 2024E (vs. peers at 5.1x), and free cash flow yields of 10% in 2023E (vs. peers at 10%) and 12% in 2024E (vs. peers at 10%). We believe Cenovus should trade at average/above-average multiples vis-a-vis our peer group, reflective of its capable leadership team, strengthened balance sheet, bolstered shareholder returns, and improving downstream performance.