Cenovus Energy Inc T.CVE

TD Report

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Cenovus Energy Inc.

(CVE-T, CVE-N) C$14.85 | US$12.00

Conference Call Highlights and Updated Estimates

Event

Updating estimates following Q3/21 call (highlights below). Initial thoughts here.

Impact: NEUTRAL

 Likely initiates buybacks next month: CVE exited Q3/21 with ~$11bln of net debt and expects to reach $10bln imminently, which is the trigger for initiating buybacks (we estimate December). It believes $8bln-$10bln is the sweet spot and is comfortable with a mid-BBB credit rating (lower IG), and that this range strikes a balance between leverage and shareholder returns. Management also believes buying back stock in the open market is superior to a block purchase from COP (currently owns ~7%) as it offers flexibility on execution.

 2022 capex likely up y/y: Management continues to guide to $2.4bln of sustaining capex for 2022 but referenced a recent underspend. Some catch-up spending is therefore likely. Since Superior refinery rebuild capex is excluded from sustaining capex, we estimate 2022E capex of $2.9bln ($2.4bln for sustaining capex, $0.3bln of catch-up spending, and $0.2bln for Superior before insurance recoveries). Management commented that Q3/21 Superior insurance proceeds were ~US$100mm and should increase in Q4/21 (we estimate ~ $410mm for 2021). Any organic growth would focus on brownfield expansions and debottlenecking and would have to return cost of capital at US$45/bbl WTI and $1.70/mcf AECO.

• As a reminder, Liwan gas prices are largely fixed (i.e. bound by contracts with a relatively narrow pricing range): CVE and CNOOC are engaging local markets to maximize production/sales volumes in light of the regional energy crisis.

• Oil Sands Pathway to Net Zero: Recall, the Alliance issued interim targets (2030/2040) last month (note). Today, COP (Surmont operator) joined the Alliance (link). CVE remains in discussions with various levels of government on CCUS tax credits. We are anticipating an update in the coming months.

  TD Investment Conclusion

  We believe CVE's higher level of downstream integration has improved overall sustainability, while increased scale ensures North American market relevance. We see potential upside to its run-rate annual synergies target of $1.2B. Although CVE is new to refinery operatorship and offshore, we are confident any near-term integration risk will continue to be more than offset by performance improvements and superior positioning in what remains an inherently volatile industry.