Cenovus Energy Inc T.CVE

RBC Equity Research - First Glance

[JohnSP]

Sentiment: Neutral

Our view: Cenovus Energy’s first-quarter results reinforce our confidence in the company’s long-term outlook and willingness to bolster its shareholder returns. The company’s CFPS, EPS and capital spending came in above Street consensus, while production rates were broadly in line (see table below). Importantly, the company’s Board of Directors has approved a tripling of the base dividend (to $0.42 per share annualized) starting in the second-quarter of 2022.
 

Key Points

• Cenovus has refined its shareholder return policy: when net debt is below $9 billion, 50% of excess (quarterly) free cash flow will be returned to shareholders via share buybacks and/or variable dividends. When the company’s net debt falls below its ultimate net debt target of $4 billion, 100% of excess (quarterly) free cash flow will be returned to shareholders through buybacks and/or variable dividends.

• Cenovus generated $1.8 billion of free cash flow in the quarter and its net debt stood at $8.4 billion (generally in line with RBC at $8.3 billion) as of March 31. The company has adopted an ultimate net debt target of $4.0 billion.

• The company continues to execute its NCIB and has repurchased 58 million common shares as of April 26, delivering over $1 billion in returns to shareholders under its NCIB to date.

• Christina Lake production in the quarter came in at 254,100 bbl/d (vs. RBC at 258,500 bbl/d) while Foster Creek production was 197,900 bbl/d (vs. RBC at 196,500 bbl/d).

• Refining margin (US + Canadian manufacturing) of $537 million came in well above our $290 million estimate. This reflected solid Canadian manufacturing margins of $114 million in the first-quarter, and $423 million in the US Manufacturing segment.

• Cash tax expense of $425 million was above our expectation of $122 million.

• Also included in Cenovus’ first quarter-results was a working capital build of $1.2 billion and realized hedging losses of $974 million, which the company had declared in its recent risk management update where it announced the suspension of its crude oil risk management activities relating to WTI.

• Cenovus closed the sale of its Tucker asset in the Oil Sands segment for net proceeds of $730 million and its Wembley assets in the Conventional business for net proceeds of approximately $220 million in the quarter.

• The previously announced $420 million sale of the Cenovus’ retail fuels network remains ongoing, with an anticipated close in the third-quarter of 2022.

  2022 Guidance

• Cenovus has updated its 2022 guidance to reflect the sale of its Tucker and Wembley assets, which now points toward 760,000-800,000 boe/d (RBC at 776,000 boe/d) of production amid a higher $2.9-$3.3 billion capital program (including $500- $550 million associated with the Superior refinery rebuild).

• In connection with higher commodity prices (US$94 WTI), Cenovus’ updated 2022 guidance factors in higher cash taxes of $1.4- $1.7 billion (vs. RBC at $1.1 billion) and higher royalty rates in many areas. Inflationary pressures throughout the sector along with higher fuel costs also push up the company’s unit cost expectations vis-a-vis its December guidance. Many of these items are already factored into our estimates, but we will need to tune up our model, including cash taxes.