September 6, 2022
Cenovus Energy Inc. Quick Update with Mr. Sandhar
Our view: Our constructive stance towards Cenovus reflects its capable leadership team, strengthening balance sheet, stern capital discipline, favorable operating momentum and rising shareholder returns. We are maintaining an Outperform recommendation on Cenovus and our one-year target price of $32 per share.
Key points:
Our recent update with Cenovus Energy’s EVP, Strategy & Corporate Development, Kam Sandhar, highlighted the company’s ongoing opportunities to enhance its operating performance and margin capture. Kam also emphasized that with its planned major turnarounds complete, Cenovus is well positioned to generate free cash flow and reduce debt during the second-half of this year, unlocking further shareholder returns.
Looking Ahead. Cenovus is working through its 2023 budgeting process and anticipates moderately higher capital investment next year reflective of inflationary forces and targeted investment. Approved projects at Cenovus must achieve about a 10% IRR hurdle rate under trough pricing conditions (US$45 WTI, US$12.50 WCS-WTI). Cenovus pegs its 2022 exit production rate at or above 800,000 boe/d. Our production outlook for Cenovus sits at 796,000 boe/d in 2022 and 809,000 boe/d next year, supported by the return of Terra Nova (34% wi), Spruce Lake (10,000 bbl/d ramping-up in September) and growth in Indonesia. Our 2023 capital spending outlook for Cenovus sits at $4.1 billion.
Shareholder Returns. Cenovus anticipates that it could achieve its $4 billion net debt floor by year-end 2022 at current strip—opening the door to 100% payout of excess quarterly free cash flow. Enhanced shareholder returns could include intensified share repurchases, further base dividend growth and/or special/variable dividends. Our 2022 outlook factors in about $4 billion in common share repurchases under its NCIB.
Relative Valuation. At current levels, Cenovus is trading at a debt-adjusted cash flow multiple of 3.1x (vs. our global major peer group avg. of 3.5x) in 2022, and a free cash flow yield of 24% (vs. our peer group avg. of 22%). In our minds, Cenovus should trade at an average/above average multiple vis-a-vis our major peer group reflective of its capable leadership team, strengthened balance sheet, operating momentum and bolstered shareholder returns partially off-set by its fractionalized downstream portfolio. Please see our Global Integrated & E&P Comparative Valuation for a complete rundown of relative valuation across our coverage universe.