Q1/24 CONFERENCE CALL HIGHLIGHTS AND UPDATED ESTIMATES
THE TD COWEN INSIGHT
We have updated our estimates following the Q1/24 conference call with takeaways below. Our initial thoughts on the quarter here. In our view, the Q1/24 call highlighted CVE's ongoing commitment to RoC (despite some initial investor confusion over lower- than-expected Q1/24 buyback activity) and positive progress made on U.S. downstream reliability enhancements.
Impact: NEUTRAL
We see Superior potentially nearing capacity towards the end of the summer: Beyond the PADD 2 macro outlook, this remains the key downstream catalyst, in our view. All Superior units are now running except for the HF alkylation unit, which is expected to be brought online in Q3/24.
Beyond Superior, CVE continues to optimize its U.S. downstream portfolio through feedstock selection, product placement, and cost controls. Looking to product placement, CVE is evaluating options to send finished products into PADD 1 (East Coast where cracks are better aligned with global markets) and Canadian markets. In our view, this should result in operating margin uplift given more favourable pricing dynamics (Canada, in particular).
Big uptick in buybacks in April, but expect variability: Through April, CVE repurchased ~ $250mm of shares at an average of $29.07/sh, vs. only $165mm for all of Q1/24 (activity impacted by a very weak January for Chicago crack spreads, in particular). CVE made it very clear that lower-than-expected activity in Q1/24 was in no way tied to its view on the intrinsic value of its shares.
We expect CVE to remain opportunistic on the buyback, but we could see quarter-to- quarter variability as it aims to match monthly excess FFF with distributions.
$4bln ND target expected to be achieved at "some point in the summer": This aligns with our Q3/24 estimate on strip. Regarding the minor tweak to the RoC framework, management reiterated that the adjustment was intended to provide additional flexibility, with the aim of protecting the balance sheet at ~$4bln ND.
Should ND drop materially below $4bln, CVE indicated that payouts could even exceed 100% of excess FFF in certain quarters.
Cadence of 2024E Christina Lake (CL) turnaround work tweaked vs. prior guide, but overall impact unchanged: While the majority of the CL planned turnaround will still be completed in Q3/24 (~44.5mbbl/d impact), some of it has shifted into Q2/24 (~12.5mbbl/ d impact) and Q4/24 (~8mbbl/d impact). With no other major upstream maintenance work planned outside the CL turnaround, the set-up for a strong year of upstream operating performance is quite good, in our view.