RBC Global Energy Best Ideas ListJust saw their latest report this morning and pleased to say that CVE is one of 8 Canadian companies on the list. For those who are curious, the others are CNQ,TOU, ARX, TVE, ALA, SES and AQN. GLTA
Cenovus Energy (CVE)
Greg Pardy, Head of Global Energy Research
(416) 842-7848 greg.pardy@rbccm.com
Integration on track. The company’s merger with Husky Energy was strategically sound in our eyes, fusing Husky’s diverse upstream/mid-stream/downstream operations with Cenovus’ bitumen-weighted upstream portfolio. Under one roof, Cenovus-Husky has become a more balanced integrated oil company with increased cash flow diversification. Our bullish stance towards Cenovus reflects its strong leadership and favourable rate of operational/financial improvement which is already underway—and set to continue.
5-year plan sets the course. Cenovus’ recent 2021 investor open house, where it unveiled a 5-year outlook, laid a path which emphasized balance sheet strength, capital discipline, free cash flow generation and further movement towards increasing shareholder returns. The company plans to allocate circa 50% of excess free funds flow in 2022, and will target 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 continues to execute its normal course issuer bid, which allows share repurchases up to 146.5 million common shares. Our 2022 outlook factors in 100% execution of Cenovus’ issuer bid.
Portfolio reshaping an opportunity. Non-core asset dispositions could also accelerate the pace at which Cenovus’ balance sheet deleverages and were explored in our recent “The Coming Yard Sale” report. In our minds, what stood out most from Cenovus’ strategic plan is the potential for further upstream-downstream portfolio reshaping through acquisitions & dispositions. Cenovus appears to have appetite for further non-core asset sales over time. It would not surprise us to see the company reshape its U.S. Manufacturing operations, where only two of its five refineries align with its preference for an operated 100% working interest.