July 12, 2023
Integrated Oil and Senior E&P 2Q Preview—Mother Nature Weighs In
The second-quarter earnings season is set to kick-off on July 27 with Cenovus Energy slated to release its results before market open, followed by Baytex Energy, MEG Energy and Ovintiv all reporting after market close that day. Our second-quarter CFPS estimates generally sit below Bloomberg (IBES) consensus but may move more into line as formal corporate surveys are released (Exhibit 1).
Second-quarter results for energy producers were buffeted by mother nature—a mild winter that hammered natural gas prices and extensive wildfires in Alberta and elsewhere. That said, quarterly results should continue to showcase the commitment of producers to reduce net debt and return free cash flow to shareholders, albeit at a bit slower pace. Planned upstream/downstream maintenance, the impact of Alberta wildfire production shut-ins and relatively stable refinery margins all point towards uninspiring results and conference calls. That said, in contrast with the first-quarter, we anticipate that net debt reduction resumed in the second-quarter—unlocking higher shareholder returns down the road.
We estimate that Canada’s oil sands weighted majors—Canadian Natural Resources, Suncor Energy, Cenovus Energy and Imperial Oil—generated free cash flow (before dividends and working capital movements) of $3.4 billion in the second-quarter, reduced net debt by $1.4 billion, repurchased $1.5 billion of their common shares and paid/accrued cash taxes (to all jurisdictions) of about $1.3 billion.
The commodity star of the second-quarter was WCS where narrowing spreads vis-a-vis WTI benefitted from reduced oil output and robust off-shore demand. For a detailed rundown on our outlook for WCS, please see Energy Insights: Canada—The Coming of TMX.
Our updated earnings/cash flow estimates reflect second-quarter actual commodity prices, our recent Global Energy Research Commodity Price Update, disclosed share buybacks and other various fine- tuning adjustments. On average, we have trimmed our one-year target prices for our coverage group by 5% amid lower estimates which are outlined in Exhibit 3. Our favorite producer remains Canadian Natural Resources (Global Top 30 and Global Energy Best Ideas), with Suncor Energy (Global Energy Best Ideas) remaining our favorite integrated over a one-year horizon. Enerplus Corporation remains our favorite intermediate producer. Baytex Energy and Cenovus Energy round out our Outperform roster.
Upstream wise, oil prices remained under pressure during the second-quarter. WTI averaged US$73.71 in the quarter—down US$2.42 (3%) sequentially, while Brent fell 5% to average US$77.93. The Canadian dollar held steady sequentially vs. the US dollar in the second-quarter to average US$0.74. Mixed Sweet Blend (Canadian Light) traded at a discount of US$2.96 to WTI (vs. US$2.85 in the first-quarter), while WTI-WCS differentials tightened to US$15.07 (vs. US$24.77 in the first-quarter). Syncrude’s SCO (as per Bloomberg) averaged $103 during the second-quarter—a 4% premium to WTI. Canadian condensate prices of $93.25 fell 13% sequentially, which should support higher bitumen realizations.
On the natural gas side of the equation, National Balancing Point (NBP) fell 35% to average US$10.46/ mmBtu in the second-quarter amid warm weather in Europe, while Title Transfer Facility (TTF) fell 29% sequentially to US$11.21/mmBtu (as per Bloomberg). Henry Hub (spot) prices averaged US$2.13/ mmBtu (down 20%) in the second-quarter, while Alberta spot (AECO C) gas prices of $2.40/mcf fell 26% sequentially amid a slightly wider Henry Hub basis of US$0.37/mmBtu.
Downstream wise, US Midwest cracks rose 5% sequentially to US$30.92/bbl, while New York Harbor 3-2-1 cracks of US$35.26/bbl were down 3% on a sequential basis. We anticipate that integrated companies Suncor and Cenovus will undergo negative FIFO-LIFO inventory adjustments in the quarter.
Cenovus Energy – Outperform
Our second-quarter production outlook for Cenovus of 729,500 boe/d reflects Christina Lake production of 235,200 bbl/d, Foster Creek production of 163,500 bbl/d (including a 19,000 bbl/d quarterly impact due to a planned turnaround), Lloydminster thermal volumes of 118,500 bbl/d (inclusive of planned maintenance with a circa 1,500 bbl/d quarterly impact), White Rose volumes of 6,000 bbl/d (due to planned maintenance) and Liwan production of 34,800 boe/d (net) (including 164 mmcf/d of natural gas at a realization of $12.63/mcf). Our Canada gas volume outlook of 467.5 mmcf/d in the second-quarter reflects the impact of Alberta wildfire shut-ins. In the downstream, we anticipate modest Canada + US refining (pre-tax) operating cash flow of $265 million (inclusive of an approximate $150 million negative FIFO inventory adjustment in the US), as Cenovus continues to ramp-up its Toledo and Superior refineries. Our estimates also include $288 million in cash taxes, capital investment of $1.05 billion, and $310 million in share repurchases in the quarter. All said, we peg Cenovus’ second-quarter cash flow at $1.9 billion ($0.97 per share) and free cash flow at $806 million (before estimated dividends of $266 million and working capital movements). As per our outlook, Cenovus’ net debt (company definition) would sit at about $6.5 billion as of June 30, down modestly from $6.6 billion on March 31. Our 2023 production outlook of 781,200 boe/d for Cenovus sits just below the lower end of the company’s guidance range of 790,000-810,000 boe/d. Cenovus anticipates achieving its $4.0 billion net debt target around the end of 2023 depending on commodity prices.