Cenovus Energy Inc. Tour de Christina Lake
Our view: Our recent group field trip to Cenovus’s Christina Lake SAGD facilities during Stampede reinforced our confidence in the quality of the company’s in-situ operations. Our constructive stance toward Cenovus reflects its capable leadership team, strengthened balance sheet, solid capital discipline, and rising shareholder returns. We maintain our Outperform recommendation and one-year price target of $33 per share.
Key points:
Christina Lake – Key Asset. Cenovus’s 276,000 bbl/d (capacity) Christina Lake (100% wi) in-situ operations commenced bitumen production back in 2002. Christina Lake accounts for approximately 29% of Cenovus’s equivalent production in 2024 and is a big bottom-line contributor, comprising about 30% of our pre-tax FFO and 43% of pre-tax free funds flow under our base outlook.
Growth Under Way. Christina Lake bitumen production flows from approximately 40 pads and 286 SAGD well-pairs (850 bbl/d avg.) and counting. Cenovus envisions that Christina Lake could support approximately 260,000 bbl/d of bitumen production in 2026, supported by the Narrows Lake tie-back project. Narrows Lake resources will be accessed via a 17 km pipeline moving about 200,000 bbl/d of steam and about 100,000 bbl/d of oil to Cenovus’s existing Christina Lake CPF. Steam will be managed across Christina Lake proper and the Narrows Lake resource to drive the highest value for the asset.
Accelerating Steam Injection. Cenovus has also focused on accelerating the pace of steam injection to produce bitumen from new well-pairs in order to optimize returns. This has served to put the natural decline rate on Cenovus’s SAGD wells at around 17–20%, which means that the sequencing of new well-pairs/pads down the road becomes quite important in terms of achieving production targets.
Potential Opex Saving. The modest presence of a field average of approximately 0.1% H2S at Christina Lake also necessitates the recovery of sulphur using a scavenger chemical. The company is undertaking an “Amine Claus” project at Foster Creek as part of its growth/optimization capital that will strip out the H2S creating elemental sulphur, thereby reducing its non- energy operating costs by about $0.75/bbl once completed.
Relative Valuation. At current levels and under futures pricing, Cenovus is trading at a 2024 debt-adjusted cash flow multiple of 5.4x (vs. our global major peer group avg. of 6.2x), and a free cash flow yield of 9% (vs. our peer group at 8%). In our view, Cenovus should trade at an average/ modest discount multiple vis-a-vis our global peer group, reflective of its capable leadership team, strengthened balance sheet, mixed downstream operating performance, and rising shareholder returns on the horizon.