Cenovus Energy Inc. Update with Jon McKenzie
Our view: Our favorable stance towards Cenovus reflects its capable leadership team, strong balance sheet, stern capital discipline, rising shareholder returns and ability to recover from operational challenges. We are maintaining an Outperform rating on Cenovus and our one-year target price of $32 per share.
Key points:
Our recent update with Cenovus Energy’s COO, Jon McKenzie, was insightful as usual, and provided a detailed downstream operations update. What stood out most from our discussion was Jon’s candidness —and resolve in reestablishing operating momentum in its US refinery operations. We suspect the company will provide further granularity on this front when it reports its fourth-quarter results on February 16.
Deleveraging Progress. Cenovus had been growing increasingly confident in the likelihood of achieving net debt below $4 billion around year-end 2022. However, two factors contributed to a weaker December, including (1) Keystone Pipeline’s 14,000 bbl spill, and (2) downstream operational challenges and severe winter weather conditions in the upper Midwest around Christmas. We peg Cenovus’ 2022 year-end net debt at $4.6 billion.
Longer-term Outlook. Cenovus’ five-year plan contains no new major growth projects—but a string of projects already in motion including a Foster Creek debottleneck (30,000 bbl/d), West White Rose (70% complete, 45,000 bbl/d peak), the Narrows Lake tie-back (20,000-30,000 bbl/d) and Sunrise enhancements (15,000-20,000 bbl/d)—and would envision annual capital investments of circa $4.0-$4.5 billion supporting production of 950,000+ boe/d in the 2026 time frame.
Free Cash Flow. We peg Cenovus’ free cash flow (before dividends and changes in working capital, and including all A&D) at approximately $8.4 billion in 2022 (US$95 WTI, US$18.53 WTI-WCS) and $7.9 billion in 2023 (US$92 WTI, US$23.56 WTI-WCS) in the context of a $4.25 billion capital program. Our 2023 outlook also reflects cash taxes payable (contained in working capital) of $1.5 billion. Under futures pricing in 2023 (US$80 WTI, US$23.29 WTI-WCS), we peg Cenovus’ free cash flow (before dividends and working capital changes, and including all A&D) at $5.9 billion.
Relative Valuation. At current levels, Cenovus is trading at a debt-adjusted cash flow multiple of 3.5x (vs. our global major peer group avg. of 4.0x) in 2023E, and a free cash flow yield of 18% (vs. our peer group avg. of 16%). 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 performance, and bolstered shareholder returns partially offset by its fractionalized downstream portfolio.