Have a $35.00 target. GLTA
CENOVUS ENERGY INC. Christina Lake Site Tour Takeaways
Cenovus hosted a tour of its Christina Lake and upcoming Narrows Lake
operations alongside executive leadership and operations staff. The tour was
attended by ~30 buyside investors and analysts. We view takeaways from
the investor group include the focus on safety, a culture of continuous
improvement, depth of knowledge in operations and an optimistic outlook in
terms of low-cost production growth. Further, the company highlighted its
depth of experience in streamlining operations and deploying new
technology. Most of the focus of the participants of the tour were on the
potential production upside associated with the Narrows Lake tie-back to
Christina Lake and the eventual ramp-down of capital spending on major
projects which could drive a growing wedge of free cash flow.
Key Takeaways
• Cenovus has extensive experience running in situ operations and
developing thermal heavy oil reservoirs. Through the tour it was
apparent the company and its staff have developed a deep and
extensive understanding of how to streamline operations to maximize
efficiency, test new technologies then quickly deploy successful
opportunities across its operations and improve recovery factors from its
wells. Cenovus highlighted an optimized timing to start gas co-injection,
the phase-out of Wedge WellTM development and its replacement with
redevelopment (redev) wells as key ways it has driven down F&D
(finding and development) costs in its operations.
• Automation and new technologies are unlocking additional uptime
and more efficient operations. Cenovus highlighted the use of AI and
machine learning to streamline and optimize operations. Examples of this
include optimizing in real time the cadence of electric submersible pumps
(ESPs) and adjusting field production levels to accommodate for ambient
temperature fluctuations on the plant through the day. This allows
operations and engineering staff to focus more on longer-term strategies
and the implementation of decades of data collection to efficiently bolster
production. Immense amounts of data is collected continuously through
operations and Cenovus using this information to improve the
management of its wells, facility and capital deployment. We expect this
could help sustain stronger uptime and lower opex and capex.
• Narrows Lake tie-back to Christina Lake is nearing completion. The
company is currently testing the integrity of the tie-back pipeline. Given
the diameter and the ~14 km length of the pipe, testing will continue to
make progress, but is in line with both the company and our
expectations. Looking forward, Cenovus estimates it will transport ~100
MBbl/d of steam to Narrows Lake which could deliver production of ~50
MBbl/d at an estimated SOR of 2.0x.
• Valuation. Cenovus trades at a P/RNAV ratio of 86%, a 2024E
EV/DACF of 4.9x and a 2024E FCF yield of 11.4% vs. the large-cap
group at 89%, 5.6x and 12%, respectively.
• FCF growth and major project completion. We continue to expect the Foster Creek expansion, Narrows Lake tie-back to Christina Lake and West White Rose projects will come to a conclusion by 2028. The company expects long-term sustainable capital spending towards the ~$3.8 billion level and help ramp production towards 950 MBbl/d (corporately). The company estimates it will have a dividend capacity of ~$2 billion in 2028, which is over 1.3x its current dividend outlay of $1.5 billion (annualized) today.