More Raised Targets After seeing Cenovus Energy Inc.’s third-quarter results as “operationally solid but financially soft,” RBC Dominion Securities analyst Greg Pardy said his favourable outlook on the Calgary-based company remains intact.
“Our constructive stance towards Cenovus reflects its capable leadership team, strengthening balance sheet, stern capital discipline, favorable operating momentum and rising shareholder returns,” he said.
On Wednesday, Cenovus reported in-line production of 777,900 barrels of oil equivalent per day, but Mr. Pardy called its downstream margins of $493-million “underwhelming.” It also declared a variable dividend of $219-million or 11.4 cents per common share.
“Cenovus’ balance sheet deleveraging progress remains unmistakable,” the analyst said. “The company’s net debt (company definition) fell more than $2.2-billion sequentially (supported by a $1.2 billion working capital draw) to stand at approximately $5.3-billion as of September 30. Cenovus anticipates reaching its magic $4-billion net debt floor around the end of 2022—opening the door to 100 per cent payout of excess quarterly free cash flow. The company defines excess quarterly free cash flow as free cash flow after common/preferred share dividends, acquisition costs, non-core dispositions closing in the quarter, and other uses of cash (including decommissioning liabilities and principal repayments of leases). Enhanced shareholder returns could include intensified share repurchases, further base dividend growth and/or special/variable dividends.
“On that front, Cenovus will continue to weigh base dividend growth with variable dividends as it moves into next year, but remains disciplined by top-line/bottom-line growth and sustainability considerations under trough pricing conditions (US$45 WTI and US$12.50 WTIWCS). This is very sensible in our minds because you never know what lies around the corner when it comes to oil markets.”
Reiterating an “outperform” rating for Cenovus shares, Mr. Pardy raised his target by $1 to $32. The average is $33.18.
“Cenovus is trading at a debt-adjusted cash flow multiple of 4.5 times in 2022 and 3.4 times in 2023 (vs. our Canadian major peer group avg. of 4.8 times in 2022 and 4.2 times in 2023) and a free cash flow yield of 15 per cent in 2022 and 19 per cent in 2023 (vs. our peer group avg. of 18 per cent in 2022 and 19 per cent in 2023),” he said. “In our minds, Cenovus should trade at an above average multiple vis--vis our peer group reflective of its capable leadership team, much improved balance sheet, upstream operating momentum and bolstered shareholder returns partially off-set by its fractionalized downstream portfolio.”
Elsewhere, Raymond James’ Michael Shaw moved his target to $32 from $30 with an “outperform” rating.
“The market rightly looked past the headline miss on upstream and downstream inventory impacts in 3Q and focused on 1) accelerated shareholder returns for 2023 and 2) a downstream recovery in 4Q. We expect the market will appreciate the 1Q step-up in shareholder returns and the improved downstream operating results next quarter,” he said. “The combination of CVE’s ongoing strong performance in its core oil sands assets and the application of CVE’s SAGD expertise to Sunrise should contribute to CVE’s continued outperformance.”