Cenovus Energy Inc T.CVE

TD

[retiredcf]

Have a $31.00 target. GLTA

TOUGH Q FOR DOWNSTREAM BUT ALREADY HEAVILY DISCOUNTED + STRONG MID-TERM OUTLOOK

THE TD COWEN INSIGHT

If we assign zero value to CVE's downstream assets, we estimate that it still trades at a discount to its Integrated peers (and U.S. majors). While we have low Q3/24 downstream expectations, we consider the corp. H2/25-2026 outlook more constructive given potentially best-in-class 2024-2026E per FCFPS/PPS CAGRs, as expansions are completed. We are short-term cautious, and mid-term bullish on CVE.

Event: Updating Q3/24 estimates and revisiting relative valuation.

Impact: MIXED

Even if we assign no value to downstream, CVE still remains heavily discounted (Fig. 1): Despite CVE's Canadian/U.S. downstream accounting for only 17%/10% of corp. operating margin in 2022/2023, respectively, U.S. downstream performance still consumes disproportionate airtime with investors. In our view, this has overwhelmed CVE's strong upstream performance and economic growth initiatives, and has weighed on its shares YTD (+6% vs. Integrated peers +25%).

• In Figure 1, we stripped CVE's Canadian/U.S. downstream out of our model (2025E EBITDA, opex, capex) to assess how its stand-alone upstream assets could be getting valued.

• On strip, and after removing downstream, we estimate that standalone upstream trades at an 11% FCF yield vs. Integrated peers at 8.6% (U.S. majors 5.6%). We consider this overly punitive.

  Rate of change still favors CVE through 2026 (Fig. 2): In May (note), we assessed the multi- year outlook for CVE vs. peers, and concluded that 2024-2026E rate-of-change favored CVE on several KPIs. With our 2026E estimates further dialed-in, this conclusion still holds.

Therefore, while Q3/24 downstream results will underwhelm, the H2/25+ corp. outlook is more upbeat. However, the market may continue to heavily discount downstream, pending stabilization of utilization across its refineries and consistent, positive downstream EBITDA generation (the latter will require supportive PADD II crack spreads).

Another tough downstream quarter, marked by heavy maintenance and margin weakness: For U.S. downstream, we suspect a combination of planned turnarounds (Lima in particular) and unplanned outages (when margins were strong), weighed on Q3/24 margin capture. This was likely further exacerbated by a negative FIFO headwind as oil prices fell, in our view. We therefore forecast U.S. operating margin of -$214mm.

Recall also that Christina Lake had a planned turnaround in September, impacting production by ~45mbbl/d. We model Q3/24 total production of 768mboe/d (1% above trailing 30-day consensus at 760mboe/d) and pre-WC cash flow of $1.14/sh (3% below consensus at $1.18/sh).