Cenovus Energy Inc T.CVE.WT

TD

[retiredcf]

Have a $33.00 target. GLTA

Cenovus Energy Inc.

(CVE-T, CVE-N) C$27.93 | US$20.51

FFOPS Miss; Declared First-ever Variable Dividend

Event

Q3/22 results. Call at 11 a.m. ET (1-888-394-8218/1-647-794-4605/webcast).

Impact: MIXED

• First-ever variable dividend of $0.114/share/$219mm (vs. TD estimate of $0.14/share): This was largely expected, in our view, since: 1) management had indicated in recent quarters that variable dividends would be considered; and 2) Q3/22 share buybacks of $659mm accounted for only 38% of excess free funds flow (FFF) of $1.8bln. Including the variable dividend, Q3/22 capital returns met CVE's pledged 50% of excess FFF target.

  • CVE intends to renew its NCIB program to repurchase up to 137mm shares (10% of public float) after the current NCIB expires on November 8. It had repurchased 122mm shares effective yesterday (83% completion of current NCIB).

  • We estimate strip 2023E FCF yield/total cash return yield of 16%/11% (vs. peers at 18%/11%).

• FFOPS miss, production in-line: FFOPS of $1.46 was 8% below consensus/ our estimate, while production of 778 mboe/d was in line. The FFOPS miss vs. our estimate was primarily driven by lower-than-expected U.S. downstream EBITDA ($504mm or $0.25/share) and lower-than-expected FCCL margins, offset by lower-than-expected cash taxes ($413mm or $0.21/share).

  • U.S. downstream EBITDA of $167mm was negatively impacted by a $420mm FIFO headwind, and the Toledo fire. No update on Toledo deal closing (consistent with BP's messaging yesterday, note), although CVE now expects 2022 downstream throughput and opex to fall modestly outside of prior guidance.

  • Canadian downstream benefited from widening WCSB differentials, posting $249mm of EBITDA (strongest result since HSE merger).

  • Cash taxes of $76mm fell sharply vs. $902mm in Q2/22, driven by a $185mm U.S. cash tax recovery and lower expected 2022E cash tax (now vs. Q2).

• 2022 capex tracking guidance: Recall CVE increased 2022E budget to $3.5bln with Q2/22 results. It has spent ~70% YTD. We currently model $3.9bln for 2023 to reflect the WWR restart and inflation.

• Net debt falls to $5.3bln (vs. $7.5bln exiting Q2/22); one step closer to 100% return of excess FFF: Recall CVE's excess FFF return target increases to 100% when ND hits $4bln (we estimate Q2/23 on strip). Its ultimate $4bln ND target would represent ~1.0x net debt/AFF at US$45/bbl WTI, which we consider conservative gearing.