October 18, 2022
Cenovus Energy Inc. Update with Jon McKenzie
Our view: Our favorable stance towards Cenovus reflects its capable leadership team, much stronger balance sheet, stern capital discipline, favorable operating momentum and rising shareholder returns. We are maintaining an Outperform recommendation on Cenovus and our one-year target price of $32 per share.
Key points:
Our recent discussion with Cenovus Energy’s COO, Jon McKenzie, was insightful as usual, and pointed towards ongoing opportunities to boost the company’s upstream-downstream operating performance. Cenovus’ focus on reducing its condensate consumption—which remains its single biggest cost—also stood out from our conversation. Finally, Jon remains very happy in his current role as COO at Cenovus.
Operations Update—Lots Going On. Cenovus continues to work with bp on the incident at the Toledo refinery in September. The company looks upon its Toledo facility as an important strategic component of its US mid- continent refining footprint, and has coveted operatorship for some time.
Net Exposure to WCS-WTI spreads. In 2023, we estimate that Cenovus will be long about 440,000 bbl/d of blended bitumen (diluted bitumen) production vis-a-vis its heavy oil refining capacity. Cenovus estimates that every US$1 change in WCS-WTI spreads impacts its annual cash flow by approximately $60 million—a US$5 change would suggest around a $300 million annual impact.
Shareholder Returns and FCF. We anticipate that Cenovus could achieve its $4 billion net debt floor around the end of 2022 or early 2023 under futures pricing—opening the door to 100% payout of excess quarterly free cash flow. We peg Cenovus’ free cash flow (before dividends of $679 million, including all A&D) at approximately $10.4 billion in 2022 under our base outlook (US$102 WTI, US$15.24 WTI-WCS), and $8.5 billion under futures (US$95 WTI, US$18.49 WTI-WCS).
Relative Valuation. At current levels, Cenovus is trading at a debt-adjusted cash flow multiple of 3.3x (vs. our global major peer group avg. of 3.7x) in 2022, and a free cash flow yield of 22% (vs. our peer group avg. of 21%). In our minds, Cenovus should trade at an average/above average multiple vis-a-vis our major peer group reflective of its capable leadership team, strengthened balance sheet, operating momentum and bolstered shareholder returns partially off-set by its fractionalized downstream portfolio.