Cenovus Energy Inc. Downstream Execution Key
Our view: There is plenty of horsepower in Cenovus’s downstream segment to drive cash flow, but unlocking it will require smoother execution across the board, including at third-party facilities. As such, we look upon Cenovus’s downstream as a big driver of achieving its $4 billion net debt target—and regaining its market groove. We maintain our Outperform recommendation on CVE and our one-year price target of $32 per share.
Key points:
4Q Results. Cenovus Energy delivered mixed fourth-quarter results, punctuated by in-line production of 806,900 boe/d and better than expected downstream margins of $558 million. The stock’s relative underperformance today likely reflected its signal that reaching its $4 billion net debt target (which unlocks 100% shareholder returns) would likely not occur until the end of the third quarter.
A New Leader. Cenovus announced senior leadership changes that are very sound in our view. Current President and CEO Alex Pourbaix will shift roles to Executive-Chairman, while current EVP and COO Jon McKenzie will become President and CEO. Both appointments are effective April 26.
Downstream Update. The company provided details surrounding its downstream operations following weather-related impacts, unplanned outages, and third-party pipeline outages in December. Cenovus expects to return to normal operations throughout the entirety of its downstream portfolio by mid-2023.
Free Cash Flow. We peg Cenovus’s free cash flow (before working capital movements and dividends and including A&D) at approximately $8.2 billion in 2023 under our base outlook (US$92 WTI, US$23.56 WCS-WTI, US$32.50 NYH 3-2-1). Under upstream futures pricing in 2023 (US$78 WTI, US$18.29 WCS-WTI), we estimate the company’s free cash flow at $6.4 billion.
Relative Valuation. At current levels, Cenovus is trading at a 2023E debt- adjusted cash flow multiple of 3.4x (vs. our global major peer group avg. of 4.0x) and a free cash flow yield of 19% (vs. our peer group at 17%). We think Cenovus should trade at an average/above-average multiple vis-a-vis our peer group, reflective of its capable leadership team, strengthened balance sheet, operating performance, and bolstered shareholder returns, partially offset by its fractionalized downstream portfolio.