Cenovus Energy Inc. Are We There Yet? Not Quite
Our view: Cenovus’s third-quarter results reinforced our confidence in the company’s integrated model and free cash flow generation. We recognize that there may be some market fatigue in terms of the company achieving its $4 billion net debt floor (which we now anticipate could occur in the first half of 2024), but we believe that patience will be rewarded. Meanwhile, Cenovus is distributing one-half of its free cash flow to shareholders. We maintain our Outperform recommendation on Cenovus and raise our one- year price target by $2 (7%) to $32 per share.
Key points:
Cenovus delivered respectable third-quarter results that were punctuated by 1% higher upstream production of 797,000 boe/d, robust oil realizations, and sizeable Liwan natural gas volumes. Much improved downstream margins of $922 million also played a lead role in Cenovus’s solid third quarter (supported by $400 million of gains associated with crude oil purchased at lower prices in prior periods).
Net Debt Target. Under our base outlook, we peg Cenovus’s net debt (company definition, excluding working capital movements) at $5.3 billion at year-end 2023. Under 2023 futures pricing, we peg the company’s net debt at $5.4 billion at year-end 2023. We now expect that the company could achieve its $4.0 billion net debt target within the first half of 2024 under both our base outlook and futures.
US Downstream – Progress. The Toledo refinery ran at a 90% utilization rate in the quarter, while Superior ramped up toward a full start-up of its fluid catalytic cracker unit, which was achieved in early October. In the fourth quarter of 2023, Cenovus anticipates planned maintenance in its US Manufacturing segment to impact throughput by around 55,000–65,000 bbl/d.
Free Cash Flow. We peg Cenovus’s free cash flow (before working capital movements and estimated base dividends, excluding A&D) at approximately $5.5 billion in 2023 under our base outlook and $5.1 billion under current futures prices. In 2024, we peg the company’s free cash flow at $7.8 billion under our base outlook and $5.9 billion under futures prices.
Relative Valuation. At current levels, Cenovus is trading at a 2023 debt- adjusted cash flow multiple of 5.1x (vs. our Canadian major peer group avg. of 6.3x) and a free cash flow yield of 11% (vs. our peer group at 10%). In 2024, the company is trading at a debt-adjusted cash flow multiple of 3.6x (vs. our peer group at 4.6x) and a free cash flow yield of 17% (vs. our peer group at 16%). We believe that Cenovus should trade at an average multiple vis-a-vis our peer group, reflective of its capable leadership team, strengthened balance sheet, improving downstream operating performance, and bolstered shareholder returns.