Scotia Capital analyst Jason Bouvier downgraded Cenovus Energy Inc. to “sector perform” from “sector outperform” on Friday, projecting weaker-than-anticipated downstream operational performance in the first half of the year.
“The restart of the Superior and Toledo refineries is having a greater impact on CVE’s U.S. downstream cash flows than expected,” he said. “Margins at these refineries will be weaker than usual as they are restarted and optimized. As such, we expect the Street’s H1/23 estimates to drop meaningfully.”
“Weakening refining margin outlook will increase cash flow volatility. CVE’s downstream assets, largely located in the US, have lower margins than its Canadian peers. Given our bearish thesis on global crack spreads, we expect CVE’s downstream cash flows to fall more than its Cdn peer group.”
Mr. Bouvier also sees a “longer timeline for higher shareholder returns.”
“CVE is currently returning 50 per cent of its free cash flow, after base dividends, to shareholders and this will increase to 100 per cent once net debt hits $4-billion,” the analyst said. “However, we estimate that it will take until late Q3/23 to hit this target. Ultimately, this will slow the pace of shareholder returns. However, we continue to expect an increase to the base dividend (could be sizable) this Spring. It’s important to keep in mind that all of our Cdn Large Caps will see increasing net debt in Q1 due to a combination of tax installments, a use of working capital due to commodity price swings and/or closing acquisition costs.
“We forecast modestly lower production than the Street for 2023. Our current estimate for 2023 production is 800 mboe/d. This compares to CVE’s guidance of 800 – 840 mboe/d and Street expectations of 814 mboe/d. In our view, production has been affected by the slower-than-expected ramp-up of Terra Nova (shifted from Q2 to mid-year) and slower-than-expected growth in the conventional business.”
He reiterated a $28 target for Cenovus shares. The current average is $31.83.