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Cenovus has 'line of sight' for 5 years of dividend increases

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Oil rig floorhands from Akita Drilling work on an oil rig at the Cenovus Energy Christina Lake Steam-Assisted Gravity Drainage (SAGD) project 120 km (74 miles) south of Fort McMurray, Alberta, August 15, 2013. Cenovus currently produces 100,000 barrels of heavy oil per day at their Christina Lake tar sands project. REUTERS/Todd Korol  (CANADA - Tags: ENERGY BUSINESS)
Oil rig floorhands from Akita Drilling work on an oil rig at the Cenovus Energy Christina Lake Steam-Assisted Gravity Drainage (SAGD) project. REUTERS/Todd Korol

Cenovus Energy (CVE.TO)(CVE) shares climbed on Wednesday, after the Calgary-based integrated oil and gas producer tripled its dividend and spelled out plans to keep sharing the wealth with investors.

"Today we've laid out a clear path for how we will continue growing shareholder returns while positioning the balance sheet to support that returns growth profile for years to come," CEO Alex Pourbaix told analysts on a post-earnings conference call on Wednesday.

In addition to boosting its base dividend from $0.14 per share to $0.42 per share annually in the second quarter of 2022, the company announced a new stock buyback plan that will target a 50 per cent return of free cash flow when net debt falls below $9 billion. That will increase to 100 per cent once the figure drops below $4 billion, which management hopes to see by the end of this year.

Pourbaix adds that he has "line of sight" to continue boosting the company's dividend over the next five years.

"We see lots of opportunity to continue to reasonably grow it," he said.

Stronger oil prices saw Cenovus swing to a $1.6 billion profit in the first quarter of 2022, compared with a $408 million loss in the final quarter of 2021. Toronto-listed shares climbed 7.73 per cent to $22.73 as at 1:32 p.m. ET on Wednesday. The stock has climbed nearly 125 per cent over the past 12 months.

Russia's invasion of Ukraine in February pushed the price of oil higher throughout the quarter, adding to momentum from tight supply conditions before the war. According to Scotiabank Global Equity Research, West Texas Intermediate crude averaged US$94 per barrel in Q1 2022, up 22 per cent from Q4 2021 levels. WTI (CL=F) fell slightly on Wednesday to just over US$100 per barrel.

Cenovus has become Canada's third-largest oil and gas producer after completing its acquisition of rival Husky Energy last year. The company says its upstream production rose to 798,600 barrels of oil equivalent per day (boepd) in the three months ended March 31, up from 769,254 boepd a year earlier.

Cenovus boosted its 2022 capital spending plans by $300 million on Wednesday, to between $2.9 billion and $3.3 billion. The increase was attributed to higher expected costs for its Superior Refinery rebuild.

However, Pourbaix assures investors that shareholder returns remain his top priority.

"Nobody should expect that there is any word salad here, where we're looking to move away from the discipline that we have shown to date," he said.

Cenovus is a member of the Oil Sands Pathways to Net Zero initiative, which aims to use carbon capture and other technologies to cut GHG emissions from operations to net-zero by 2050. Other members include Suncor (SU.TO)(SU), Canadian Natural Resources (CNQ.TO)(CNQ), Imperial Oil (IMO.TO)(IMO), MEG Energy (MEG.TO), and ConocoPhillips (COP).

The companies have estimated that it will cost $75 billion over 30 years, or roughly $2.5 billion per year, to eliminate the 68 megatonnes of greenhouse gases they emit annually today. The group has proposed a major carbon capture and storage transportation line that would capture CO2 from oilsands facilities and transport it to a storage facility near Cold Lake, Alta.

Pourbaix calls Ottawa's $2.6 billion carbon capture and storage (CCUS) tax credit announced in the latest federal budget "a good start." However, he says assistance from the Alberta government will be critical.

"We're going to require some more help at a steady state to go forward with these really meaningful CCUS projects," Pourbaix said. "We're talking about a massive change in how energy is produced and delivered as we decarbonize the upstream."

Asked why his company requires such funding amid strong financial performance, Pourbaix replied: "I think everyone on both sides of the debate has a very short memory. I personally have a pretty long memory about this, and I remember oil being at US$10 a barrel a couple of years ago."

"Oil prices right now are obviously very attractive. We know, probably before that project is ever in service, that we'll test the bottom end of those prices again," he added. "We have to have certainty that... we can manage those investments over the entire commodity cycle."

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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