Cenovus Energy
FFO BEAT; 29% DIVI HIKE + SECOND-EVER VARIABLE; STRONG U.S. DOWNSTREAM PRINT
THE TD COWEN INSIGHT
In our view, Q1/24 results were positive and highlighted ongoing strategic consistency on returns to shareholders and a significant step towards restoring investor sentiment on U.S. downstream, in our view. Conference call at 11 a.m. ET (1-888-664-6383/webcast).
Impact: POSITIVE
29% dividend increase underpins commitment to shareholder capital returns, in our view:
CVE announced a larger-than-expected 29% increase to the annual dividend to $0.72/share, equating to a pro-forma yield of 2.5% vs. peers CNQ (4.0%), IMO (2.5%), and SU (4.2%).
Declares second-ever variable dividend, achieving 50% excess FFF payout in Q1/24: This was not entirely surprising, in our view, considering share buybacks of $165mm in Q1/24 accounted for only 20% of excess FFF of $832mm and CVE having previously declared a variable dividend to 'top-up' quarterly RoC. Combining buybacks with $251mm in declared variable dividends ($0.135/share), CVE returned 50% of Q1/24 excess FFF (on target).
We continue to believe share repurchases will remain CVE's first call on excess FFF, with variable dividends used to 'top-up' RoC when buybacks are deemed less attractive (i.e., at a higher share price). We like the opportunistic approach to buybacks (over programmatic).
Exits quarter with $4.8bln ND (vs. $5.1bln exiting Q4/23); tweaks RoC framework: Note, a $269mm WC headwind in Q1/24. On strip, we still see CVE achieving its $4bln ND target in Q3/24, at which point it will transition to 100% return of excess FFF.
CVE also tweaked its RoC framework to address scenarios whereby ND exceeds $4bln in any given quarter. At ND >$4bln, CVE will not revert to 50% excess FFF payout, but instead deduct the amount by which the previous quarter's ND exceeded $4bln from the 100% excess FFF payout. In our view, this fully addresses what has been a common investor question.
Posts slight FFOPS beat on in-line production: FFOPS of $1.17/share was 3%/1% above consensus/TD estimates. Production of 801mboe/d (613mbbl/d oil sands) was in-line. The FFOPS beat vs. our estimates was largely driven by stronger-than-expected U.S. downstream results.
U.S. downstream EBITDA of $492mm was materially ahead of consensus/TD estimates at $302mm/$284mm (note a FIFO $195mm tailwind) on U.S. refinery utilization of 87% (TD/consensus at 89%).
- In our view, this quarter marks a positive step towards turning the corner on investor sentiment with respect to the cash generation potential of U.S. downstream.