July 9, 2024
Cenovus Energy Inc.
Update with Jon McKenzie & Kam Sandhar
Our view: Our constructive stance towards Cenovus reflects its capable leadership team, strengthened balance sheet, improving downstream operating performance and rising shareholder returns on the horizon. The company expects to achieve its $4.0 billion net debt target sometime this summer which would unlock 100% shareholder returns. We are maintaining an Outperform recommendation on Cenovus and our one-year target price of $33 per share.
Key points:
Our recent meeting with Cenovus Energy’s President & CEO, Jon McKenzie, and CFO, Kam Sandhar, pointed towards confidence in terms of the company’s operational/financial performance this year.
Strategic Priorities. Priority wise, Cenovus remains focused on executing its upstream growth initiatives and driving further reliability in its US downstream operations. The company is in the second year of a three-year capital cycle that should boost its upstream production by approximately 150,000 boe/d (including 20,000-30,000 boe/d of conventional production) down the road. These growth initiatives would put Cenovus’ equivalent production in the circa 950,000 boe/d range in the 2028 timeframe—up from around 800,000 boe/d this year.
Liwan. The company continues to seek an extension to its Liwan natural gas sales contracts with CNOOC. As a source of about $1 billion of operating margin last year, Liwan is a core asset for Cenovus. The company is currently drilling an exploration gas well (100% wi before CNOOC back-in) on Bloc 34-2 in the South China Sea.
TMX Impact. Cenovus has 144,000 bbl/d of capacity on the 590,000 bbl/ d Trans Mountain Expansion and is selling diluted bitumen FOB (Origin) at the Westridge Marine Terminal in the Burrard Inlet. The company’s sales of dilbit are being made at a differential to WTI of circa US$5-US$7, with most of the barrels destined for California.
Free Cash Flow. We peg Cenovus’ free cash flow (before working capital movements and estimated base dividends, excluding A&D) at approximately $5.8 billion in 2024 under our base outlook (US$79 WTI, US $13.96 WCS-WTI, US$25 NYH 3-2-1) and $5.0 billion under current futures prices (US$81 WTI, US$16.85 WCS-WTI, US$24 NYH 3-2-1).
Relative Valuation. At current levels and under futures pricing, Cenovus is trading at a 2024E debt-adjusted cash flow multiple of 5.0x (vs. our global major peer group avg. of 6.1x), and a free cash flow yield of 10% (vs. our peer group at 9%). In our minds, Cenovus should trade at an average/ modest discount multiple vis-a-vis our global peer group, reflective of its capable leadership team, strengthened balance sheet, mixed downstream operating performance and rising shareholder returns on the horizon.