Calling its first-quarter earnings report as a “strong positive,” ATB Capital Markets analyst Patrick O’Rourke now sees a “compelling” capital return outlook for Cenovus Energy Inc. (
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Shares of the Calgary-based company soared 10.3 per cent on Wednesday following the premarket release, outperforming the 3.4-per-cent increase for the TSX Energy Capped Index.
“Upstream operations, particularly at Foster Creek and Christina Lake, demonstrated continued strong production profiles, and U.S downstream contributed an impressive $423-million in operating margin in the quarter (relative to a loss of $97-million in Q4/21) on the back of strong crack spreads and improving efficiencies,” the analyst said.
Cenvous reported cash flow per share of the quarter of $1.30, beating the consensus expectation on the Street by 20.4 per cent ($1.08). Upstream production rose to 798,600 barrels of oil equivalent per day from 769,254 boepd a year earlier, in line with the 800,000-barrel forecast.
The company also announced its base dividend will increase from 14 cents per share to 42 cents annually, beginning in the second quarter of this year.
“While the Company did recognize some higher costs in guidance across the capital and operating structure as expected (particularly with $300-million related to the Superior refinery rebuild), we continue to believe that the impact of strong pricing and operations will have an outsized relative effect on the FCF profile (and higher cash costs already previously considered in our forecast),” said Mr. O’Rourke.
“Finally, the Company continued its commitment to shareholder returns, tripling the base dividend to 42 cents (implied 1.8-per-cent yield on current closing price of $23.27) and codifying a framework that will emphasize a further 50 per cent of FCF targeted to share buybacks (with the remainder of the 50 per cent to variable dividends) at debt levels below $9-billion, increasing to 100 per cent of FCF at debt levels below $4-billion. Our model projects that under our current pricing and operational scenario, CVE will hit its $4-billion net debt target in H1/23 on the back of $2.8-billion in incremental capital returns (above the core dividend) for the balance of 2022.”
Maintaining an “outperform” recommendation for Cenovus shares, the analyst raised his target to $33 from $31. The average on the Street is $26.63.
“CVE currently offers the second highest upside of the Oil Sands group to our intrinsic NAV-based price target, at 44 per cent, while we see an average upside of 27 per cent for the group, a key driver of our outperform rating,” said Mr. O’Rourke. “The focus on Cenovus’ merger with Husky was on improving market access and integrating its operations from the wellhead to the refinery. Cenovus is now focused on the $1.2-billion in identified cost structure savings and the project high gradings that were laid out in the merger announcement, and given the confidence and execution that CVE has been conveying, we believe there is further potential upside, though broader economic inflationary pressures may limit that. In addition, we continue to believe there is plenty of opportunity to improve upon the prior existing and Husky-acquired assets (most visibly through the margin enhancing integration of Foster Creek/Christina with Husky’s Lloydminster upgrader). Finally, we have been highlighting that CVE is also best positioned for asset rationalization that accelerates debt repayment and the path to shareholder returns relative to peers; with the announcement of the sale of the Husky retail network, Wembley assets, and the Tucker disposition, CVE announced dispositions in 2021 more than $1.9-billion and has now provided a clear return of capital framework and accelerated its return of capital (dividend tripled with Q1/22 reporting.”
Elsewhere, RBC Dominion Securities analyst Gregory Pardy raised his target to $28 from $27, keeping an “outperform” rating.
“Our bullish stance towards Cenovus reflects its capable leadership team, strengthening balance sheet, stern capital discipline, favorable operating momentum and rising shareholder returns—including tripling its common share dividend,” said Mr. Pardy.
“Cenovus remains our favorite Canadian integrated producer and is on our Global Energy Best Ideas list.”