Cenovus Energy Inc. Unloved & Oversold
Our view: Our constructive stance towards Cenovus reflects its capable leadership team, strengthened balance sheet, capital discipline and rising shareholder returns on the horizon. In our minds, 2024 is all about execution and delivery for Cenovus—which should manifest in relative share price appreciation. We are maintaining an Outperform recommendation on Cenovus and our one-year price target of $28 per share.
Key points:
Perhaps the most compelling near term buying opportunity amongst the Canadian oil majors these days resides with Cenovus Energy, in large part given the degree to which the stock has underperformed on a relative basis since last autumn. We cannot see around corners but based on our recent candid discussion with Cenovus’ President & CEO, Jon McKenzie, we have confidence that the company’s operating and financial results will establish improved momentum as 2024 unfolds, opening the door to relative share price appreciation over the next six months or so.
Free Option on US Downstream. In our minds, the market appears to have neutered any 2024 cash flow contribution from Cenovus’ US refinery operations, based on our preliminary analysis. Under prevailing futures pricing, we peg Cenovus’ 2024 estimated free cash flow yield (equity) at approximately 11%—a discount of 3% versus our global major peer group average (excluding Saudi Aramco) of 8%. When we remove the circa $1 billion (pre-tax) US margin contribution under futures from our analysis, Cenovus’ free cash flow yield of 9% moves more in line with our global peer group average. Accordingly, investors appear to be receiving a free option on Cenovus’ US downstream business at this juncture.
Key Catalyst—Net Debt Floor. Cenovus’ $4 billion net debt floor has proven frustratingly elusive, but its year-end 2023 results should recalibrate the timing of hitting this target. And we believe achievement of this net debt floor is a priority for the company’s leadership team. As per our previous discussion with the company, Cenovus expects to achieve its $4 billion net debt floor sometime in the second half of 2024 under prevailing commodity prices—opening the door to 100% payout of excess quarterly free cash flow.
Free Cash Flow. We peg Cenovus’ free cash flow (before dividends, changes in working capital and including all A&D) at approximately $5.8 billion in 2024 under our base outlook (US$79 WTI, US$15.83 WCS-WTI, US$25 NYH 3-2-1) and $4.4 billion under futures pricing (US$74 WTI, US$14.34 WCS-WTI, US$25 NYH 3-2-1) in the context of a $4.78 billion gross capital program. Our 2024 base outlook factors in production of 789,100 boe/d.