Desjardins Securities analyst Chris MacCulloch thinks Cenovus Energy Inc.’s portfolio optimization is primed to “hit paydirt” in 2023, predicting “significant acceleration of capital returns.”
“The company is poised to benefit from a significant ramp-up in downstream capacity next year with the planned return of the newly rebuilt Superior refinery, along with the restart and consolidation of the Toledo refinery, both of which will provide improved physical integration and additional corporate exposure to lucrative crack spreads,” he said.
On Tuesday, the Calgary-based company announced plans to boost production to 2023 with the expectation of rising global demand. It set a capital budget of $4-billion to $4.5-billion, up from $3.3-billion to $3.7-billion this year, and projects total upstream production to increase more than 3 per cent year over year to 800,000 and 840,000 barrels of oil equivalent per day.
“From our perspective, there were no major surprises in the headline numbers from the 2023 guidance release, with capital spending, upstream production and downstream throughputs all closely aligning with our previous forecast,” said Mr. MacCulloch. “However, upon working through the detailed cost guidance, we quickly discovered that our estimates were conservatively set, which was the key driver of our target bump. As a result, CVE’s 2023 FCF profile now appears even more compelling at just shy of $6-billion based on current strip prices, despite the recent deterioration in WTI prices and widening of WCS differentials, which translates into a 12-per-cent FCF yield.
“More importantly, virtually all of the spoils of elevated commodity prices and improved asset integration, particularly on the downstream side, will be distributed to shareholders in 2023 via capital returns, with the company still on track to meet its $4-billion net debt floor by year-end 2022. As a reminder, we expect incremental returns to continue leaning heavily on share repurchases based on management’s previous commentary that it views buybacks as the optimal method of returning capital when the stock is below $30 per share. In light of recent macro-driven volatility and weakness in the equity market, including for CVE, it stands to reason that the company will remain highly aggressive on the buyback front. Either way, we expect the balance of discretionary FCF to be returned through additional variable dividend payments, which could ramp up meaningfully in 2023 in the event of renewed commodity price and/or equity price strength, two events that are typically correlated in this business.”
Maintaining a “buy” recommendation for Cenovus shares, Mr. MacCulloch raised his target to $33 from $31. The average on the Street is $33.50.
Elsewhere, Raymond James’ Michael Shaw increased his target by $1 to $33 with an “outperform” rating.
“Cenovus’ 2023 budget and guidance underscores the strength of its upstream assets and the potential of its downstream business,” he said. “The mid-point of CVE’s 800 to 840 mboe/d upstream production guidance was ahead of the 815 mboe/d consensus estimate, and operating costs guidance at Christina Lake and Foster Creek were both in-line with our estimates. This highlights the quality of CVE’s in-situ oil sands projects in a challenging cost environment.”
“At our current commodity price estimates for 2023 (US$80 WTI; US$18 WCS diff), we estimate CVE will return $8.4-billion in cash to shareholders through a combination of base dividends, share repurchases and special dividends – 17 per cent of its current market cap. CVE’s FCF yield is the highest among our Canadian integrated and oil sands producers at 18 per cent and the shift to 100-per-cent FCF payout should continue to support the equity.”