Have a $35.00 target. GLTA
CENOVUS ENERGY INC. First Look: Q2/24 Modestly Below Our Expectations And
Consensus On AFFO, Achieved Net Debt Floor In July
Cenovus reported Q2/24 results that were modestly below our expectations
and consensus on adjusted FFO. Variances to our estimates stemmed
primarily from lower-than-expected margin from Canadian refining driven by
higher-than-expected costs associated with turnaround activity, which was
impacted by weather-related delays. Key takeaways from the release include
the achievement of the company’s $4 billion net debt floor in July, the
expectation of achieving mechanical completion of the Narrows Lake tie-back
to Christina Lake by year-end, structural completion of the West White Rose
concrete gravity structure and adjustments to the company’s 2024 guidance
including an increase to production and total downstream throughput.
Financial And Operating Takeaways:
• Q2/24 results. Production of ~800.8 MBoe/d (~82% liquids) was in line
with our estimate of ~778 MBoe/d (~82% liquids) and consensus of 788
MBoe/d (range of 775 MBoe/d to 795 MBoe/d). Adjusted FFO per share
of $1.26 was ~7% below our estimate of $1.35 and ~5% below
consensus of $1.33 (range of $1.23 to $1.38). Capex of $1,155 million
was in line with our estimate of $1,192 million and consensus of $1,176
million.
• Growth project update. Construction on the Narrows Lake tie-back is
88% complete with mechanical completion anticipated by year end. The
West White Rose project is ~80% completed and progressing on
schedule with first production expected in 2026.
• 2024 guidance update. Upstream production guidance increased by 7.5
MBoe/d at the midpoint to 785 MBoe/d-810 MBoe/d as a result of strong
YTD performance, in line with our estimate and consensus of ~793
MBoe/d and ~791 MBoe/d, respectively. Downstream throughput
guidance increased 5 MBbl/d at the midpoint to 640 MBoe/d-670 MBbl/d
as a result of strong YTD performance and optimization of turnaround
activities in H2/24 including some deferred activity to 2025. Our
estimates and consensus of ~647 MBbl/d and ~643 MBbl/d sit at the
bottom end of the range. Oil Sands operating costs of $10.50-$12.50/Bbl
decreased by ~12% at the midpoint, and Asia Pacific operating costs of
$9.50-$10.50/Boe decreased ~$2.00/Boe at the midpoint. Canadian
Refining operating costs of $20.25/Bbl to $22.25/Bbl increased by ~12%
at the midpoint as a result of the Lloydminster Upgrader turnaround.
• Shareholder returns. The company returned ~$1.0 billion to
shareholders in the quarter, which includes $440 million through its
NCIB, and $334 million through base dividends and $251 million of
variable dividends. The $4 billion net debt target was achieved in July,
resulting in 100% of excess free funds flow being returned to
shareholders.
• Valuation. Cenovus trades at a P/RNAV ratio of 90%, a 2025E
EV/DACF of 5.0x and a 2025E FCF yield of 11% vs. the large-cap group
at 86%, 5.6x and 12%, respectively