TSX:CVE - Post Discussion
Post by
retiredcf on Nov 01, 2024 9:05am
RBC 2
Their upside scenario target is $37.00. GLTA
Outperform
TSX: CVE; CAD 22.43; NYSE: CVE
Price Target CAD 28.00 ↓ 29.00
Cenovus Energy Inc.
US Downstream Strikes Again
Our view: Our constructive—but increasingly frustrated—stance towards Cenovus reflects its solid leadership team, strong balance sheet and impressive upstream operations. But we admit a touch of fatigue when it comes to the company’s chronically soft quarterly results this year, usually due to its US refining segment. We are maintaining an Outperform recommendation on Cenovus but trimming our one-year price target by $1 (3%) to $28 per share.
Key points:
Cenovus delivered mixed third-quarter results amid in-line production of 771,300 boe/d and bottom-line results which fell shy of our expectations. Upstream performance looked solid as ever, but soft crack capture/ maintenance in its US refinery operations spoiled the party.
US Refining Introspection. We fully agree with Cenovus’ industrial logic that US downstream integration makes sense, largely given that western Canada will move back into oil egress balance in the circa 2027 timeframe by our yardstick. No argument there, especially given that Cenovus’ upstream bitumen footprint is big and growing with the need to modulate its WCS differential exposure. We applaud the company’s urgency when it comes to delivering higher US refinery utilization rates via improved asset integrity at Lima and elsewhere. While the US downstream may not constitute a large piece of Cenovus’ overall cash flow generation, it needs to become less bad in a hurry. The recruitment of recognized talent and potentially accounting treatment changes are potentially a part of that mix. In our minds, Cenovus is unlikely to outperform on a sustained basis unless and until the tempest in its US refining operations is arrested.
Net Debt & Shareholder Returns. Cenovus’ net debt (company definition) remained largely flat sequentially at $4.20 billion as of September 30, inclusive of a working capital tailwind of $607 million. This would suggest a circa $200 million reduction to shareholder returns in the fourth-quarter as a result of its previously modified shareholder returns framework.
Free Cash Flow. We peg Cenovus’ free cash flow (before working capital movements and estimated base dividends, excluding A&D) at approximately $3.8 billion in 2024 under our base outlook and $3.6 billion under current futures prices.
Relative Valuation. At current levels and under our base outlook, Cenovus is trading at a debt-adjusted cash flow multiple of 4.9x (vs. our global major peer group avg. of 6.3x) in 2024E and 5.0x in 2025E (vs. peers at 6.3x), and free cash flow yields of 9% (vs. our peer group at 8%) in 2024E and 10% in 2025E (vs. peers at 7%). In our minds, Cenovus should trade at a modest discount valuation vis-a-vis our global peer group, reflective of its capable leadership team, strong balance sheet, 100% payout of excess funds flow to shareholders and mixed US downstream operating performance.
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