Cenovus Energy Inc.
(CVE-T, CVE-N) C$10.17 | US$8.11
Strong Quarter, Bumps Prod'n Guidance Without Touching Capex
Event
Q2/21 results. Call at 11 a.m. ET (1-888-390-0605, 1-416-764-8609, webcast).
Impact: POSITIVE
Relatively inline production; solid FFOPS beat vs. consensus (but more in line with our estimate): CVE continued what is becoming a common trend this quarter—increasing production guidance without touching capex. It boosted 2021 production guidance by 2% while leaving its $2.3-2.7bln budget unchanged ($1.1bln spent YTD). The production guidance increase reflects +10 mbbl/d from Lloydminster thermals (note record quarterly production at Christina Lake/ Lloydminster) and increases in Offshore, offset by announced conventional asset divestitures.
While the budget is intact, CVE indicated that upstream spending will increase $100mm (expected to add production in 2022 through accelerated completion of its Spruce Lake North Lloydminster project and Christina Lake redevelopment wells), offset by reduced downstream spending of $100mm to reflect efficiencies identified across the portfolio.
CVE also reduced its 2021 integration cost guidance to $400-450mm from $500-550mm, although the total cost estimate of $500-550mm is unchanged with the remainder expected to be incurred in 2022 (may come in lower than this, in our view).
On track to to achieve $1.2bln of run-rate synergies ($1bln+ in 2021) and $10bln net debt by YE2021: Like integration costs, CVE could eclipse its synergies estimate as it still does not reflect opportunities to apply its extensive in situ operating expertise to improve asset performance in Alberta/Saskatchewan. CVE seems confident in this regard and referred to "accessing the next layer of synergies" in the release.
Net debt fell $950mm in the quarter, aided by the previously announced $102mm Marten Hills GORR sale. CVE also divested $110mm of East Clearwater and Kaybob assets ($12 mboe/d, 45% liquids) which is now reflected in 2021 guidance. This is expected to close in Q3/21 with proceeds earmarked for debt reduction, only further accelerating its YE2021 net debt target of $10bln ($12.4bln in June, down from $13.3bln in March).
There was no change to the deleveraging pathway thereafter—once $10bln is achieved, the target is to be reset to $8bln or lower but, at this point, incremental shareholder returns and reinvestment back into the business could also be considered.