Cenovus Energy Inc T.CVE

Alternate Symbol(s): CVE | CVE.WS | T.CVE.WT | T.CVE.PR.A | CNVEF | T.CVE.PR.B | T.CVE.PR.C | T.CVE.PR.E | T.CVE.PR.G

Cenovus Energy Inc. is a Canada-based integrated energy company. The Company has oil and natural gas production operations in Canada and the Asia Pacific region, and upgrading, refining and marketing operations in Canada and the United States. The Company's segments include Upstream, Downstream, and Corporate and Eliminations. Its Upstream segment includes Oil Sands, Conventional, and Offshore. Its Downstream segment consists of Canadian Manufacturing, and United States Manufacturing. The Company's upstream operations include oil sands projects in northern Alberta, thermal and conventional crude oil, natural gas and natural gas liquids (NGLs) projects across Western Canada, crude oil production offshore Newfoundland and Labrador and natural gas and NGLs production offshore China and Indonesia. The Company's downstream operations include upgrading and refining operations in Canada and the United States, and commercial fuel operations across Canada.

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Cenovus Energy Inc

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Post by JohnSPon Dec 08, 2021 8:58pm

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RBC Dec 8 Summary

Executing a Resilient Game Plan

Our view: Cenovus unveiled a resilient five-year plan anchored by operational excellence, capital discipline, balance sheet deleveraging and rising shareholder returns. We are reaffirming an Outperform recommendation on Cenovus and our one-year target price of $20 per share. Cenovus is our favorite integrated producer and on our Energy Best Ideas List.

Key points:

Cenovus Energy delivered a series of thorough presentations at its 2021 investor open house which emphasized balance sheet strength, capital discipline, free cash flow generation and further movement towards increasing shareholder returns in the coming quarters. The importance of operational reliability, safety and asset integrity was also a cornerstone of the event. Cenovus also unveiled its ESG game plan, with defined targets across five focus areas ranging from GHG emissions to Indigenous Reconciliation.

Shareholder Returns & Deleveraging. The company reaffirmed its commitment to growing shareholder returns commensurate with increasing balance sheet strength, with a planned allocation of approximately 50% of excess free funds flow in 2022. We were pleased to hear that Cenovus is willing to reduce its net debt below $8.0 billion —to a range of $6.0-$8.0 billion—which equates to a net debt/adjusted EBITDA ratio of 1.0-1.5x at US$45 WTI. The company has line of sight to net debt below $8.0 billion in 2022, after which its free cash flow allocation will begin to emphasize further shareholder returns, opportunistic acquisitions or incremental organic investment over debt reduction.

Portfolio Streamlining. In our minds, what stood out most from Cenovus’ strategic plan is the potential for further upstream-downstream portfolio reshaping through acquisitions & dispositions. Rather than being a headache, we suspect the Cenovus leadership team is quite excited about the degree of optionality its diverse portfolio offers. From its comments, Cenovus appears to have appetite for further non-core asset sales over time, but our sense is this excludes its Liwan (49% wi) natural gas field in the South China Sea—or Indonesia for that matter. We continue to look fondly on Liwan, in large part given the stable free cash flow it generates (which is not dependent upon oil prices), and opportunities to extend gas sales agreements at Liuhua 29-1. Cenovus announced about $1.1 billion of non-core dispositions in 2021, more than fulfilling its target of “hundreds of million of dollars.”

Relative Valuation. Cenovus is trading at a discount debt-adjusted cash flow multiple of 2.7x (vs. our global integrated peer group avg. of 4.1x) in 2022E, and an elevated free cash flow yield of 28% (vs. our peer group avg. of 17%). In our minds, Cenovus should trade at a modest discount multiple vis-a-vis our peer group reflective of its improved upstream-downstream integration following the Husky merger, much improved balance sheet and shareholder return initiatives, partially offset by its fractionalized downstream portfolio.