Cenovus Energy Inc. Shareholder Return Button Pushed
Our view: In our minds, Cenovus’ decision to double its dividend and move ahead with a 10% issuer bid reflects underlying confidence in its operating performance and balance sheet deleveraging path. We are reaffirming an Outperform recommendation on Cenovus and our one-year target price of $20 per share. Cenovus is our favorite integrated producer.
Key points:
Solid 3Q Results. Cenovus Energy delivered solid third-quarter results punctuated by 2% higher upstream production of nearly 805,000 boe/ d and free cash flow generation of $1.7 billion. The company’s net debt dropped $1.4 billion to about $11 billion as of September 30—and Cenovus expected to reach its sub-$10 billion interim target imminently—opening the door to shareholder returns.
Shareholder Returns. Cenovus announced a doubling of its common share dividend to an annualized rate of $0.14 per share (0.9% current yield). The company has also received board approval to file a normal course issuer bid (NCIB) of up to 10% (146.5 million shares) of its float shares outstanding. The NCIB is expected to be fully executed in 2022 and should help to absorb Conoco’s open market selling of its interest in Cenovus, which stood at 128.9 million common shares (6.4%) as of October 22. Optimized debt levels and shareholder distributions are expected to be focal topics at the company’s upcoming investor (virtual) open house on December 8.
2021 Guidance Intact. Cenovus affirmed its 2021 mid-point production guidance of 770,000 boe/d and $2.5 billion capital spending plan. On its conference call, the company reiterated that it had no plans to deviate from sustaining oriented capital investment levels of around $2.4 billion. Instead, the company will remain focused on smaller brownfield expansions and optimization of the Husky portfolio.
Strong FCF Generation. We peg Cenovus’ free cash flow (before dividends) at $5.3 billion in 2021 under our base outlook (US$68 WTI) and $8.4 billion in 2022 (US$81 WTI and US$12.50 WTI-WCS). This includes realized hedging losses that we peg at $809 million in 2021 and $307 million in 2022.
Relative Valuation. Cenovus is trading at a discount debt-adjusted cash flow multiple of 2.5x (vs. our global integrated peer group avg. of 4.1x) in 2022E, and an elevated free cash flow yield of 29% (vs. our peer group avg. of 18%). In our minds, Cenovus should trade at a modest discount multiple vis-a-vis our Canadian peer group reflective of its improved upstream-downstream balance and reduced exposure to Canadian heavy oil differentials following the Husky merger, partially offset by its fractionalized downstream portfolio.