Cenovus Energy Inc T.CVE.WT

TD

[retiredcf]

Q2/24 CONFERENCE CALL HIGHLIGHTS AND UPDATED ESTIMATES

THE TD COWEN INSIGHT

We have updated our estimates following the Q2/24 CC with takeaways below. Our initial thoughts on the quarter here. In our view, the call highlighted CVE management's overall confidence in successfully executing on key growth projects, and that notwithstanding challenged U.S. downstream fundamentals (i.e. the piece it generally can't control), the asset-level performance seems to be improving.

Impact: NEUTRAL

Key Data

Progress being made, but management sees more room for U.S. downstream reliability enhancements: CVE's U.S. downstream utilization averaged 90% through H1/24, well above the 74% achieved in 2023 (note, Superior/Toledo restarts). While clearly tracking in the right direction, management believes much more can be done to achieve further cost reductions and reliability enhancements.

•  Management expects the upcoming Lima refinery turnaround to potentially present an opportunity to drive longstanding reliability improvements on the asset. Of note, CVE intends to keep Lima running through the turnaround by utilizing the facilities at the pipeline-connected Toledo refinery.

•  We continue to believe CVE needs to deliver on several consecutive quarters of solid U.S. downstream operating and financial (margin) results for investors to gain confidence in the potential of the business (as evidenced by today's share price reaction, in our view).

  Expecting RoC to strongly favour buybacks: Not surprisingly, CVE reiterated that at the current share price/valuation, buybacks will remain the primary vehicle for RoC (possibly consuming all FCF). CVE hopes to match monthly FCF to repurchases, which is in contrast to certain peers who target an annualized return of FCF. We like this approach as it provides quarter-to-quarter predictability around capital returns and is an effective way to increase per-share metrics absent outsized production growth. On the current strip, we model CVE completing 68% of its current 10% NCIB program.

  Balance sheet now in order; M&A still taking a back seat: Management highlighted that funding of its strong pipeline of competitive organic growth projects remains the top priority. This is very much in line with its prior messaging.

  Revised cash opex guidance driven by positives across the numerator and denominator: Management credited higher oil sands production (re-drills, redevelopment wells, and NCG benefits), plus energy cost reductions (natural gas, power) as key drivers of lower overall opex.

 Opex has the potential to trend even lower as projects come online and as CVE continues to proactively manage input costs.