Cenovus Energy Inc. (CVE)

--EQUITY RESEARCH QUICK TAKE

--RBC Dominion Securities Inc.

--August 8, 2022

--Cenovus Energy Inc.

--Acquires Outstanding 50% Interest in Toledo Refinery from BP, Will Assume Operatorship
TSX: CVE | CAD 21.26 | Outperform | Price Target CAD 32.00
Sentiment: Positive

--Cenovus announced this morning that it has reached an agreement to purchase BP’s 50% working interest in the Toledo Refinery. Cenovus has owned 50% of the refinery since its combination with Husky Energy in 2021 and will assume operatorship of the asset upon closing of the transaction, which is expected before the end of 2022.

--Upon first glance, the US$300 million cash payment for 50% of Toledo is less than we would have expected. We will look to connect with Cenovus to learn further details about the transaction.

--Key Points
Total consideration includes US$300 million in cash, plus the value of inventory. In addition, the parties have signed a multiyear product supply agreement.
The inventory will be valued at deal close, but we understand that it is currently estimated to be about C$100-$150 million.
The transaction will give Cenovus an additional 80,000 bbl/d (including 45,000 bbl/d of heavy oil processing capacity) of downstream throughput capacity, bringing Cenovus’ total refining capacity to 740,000 bbl/d.
Cenovus expects to realize synergies over the next few years as a result of the transaction, primarily related to the optimization of feedstock and refined product sales, with the longer-term potential to connect the Toledo refinery with Cenovus’ U.S. refining network. Currently, there are existing third-party (operational) pipelines between the Toledo and Lima facilities.
--The Toledo refinery recently completed a major, once in five years turnaround to improve operational reliability.

Cenovus shareholder return plan is to return 100% of free cash flow to shareholders through repurchase and dividends when debt is reduced to 4 billion.
Q2 2022 debt is 7.53 billion, generating 2.276 billion free cash flow. CEO said in a conference call that the debt could be reduced to $4 billion by the end of the year. Now the quarterly free cash flow is 50% debt repayment, 50% return to shareholders . That is to say, Q3 and Q4 need to generate (7.53-40)*2=7.06 billion free cash flow.
Can it be reached?
Assuming Q3 oil prices, refining spreads unchanged, resulting in free cash flow of CAD 2.276 billion, + 664 million (Q2 hedge loss, no hedge after Q3) + 177 million (2022 Q2 payment for the purchase of 50% of Conoco's oil sands assets in 2017, deal end after May 2022, no further payment) + 420 million (sale of Husky gas station) - 600 million (one-time payment for the purchase of SUNRISE assets) - 75 million (installation for the purchase of SUNRISE assets, 2 years 600 million, quarterly 75 million) = 2.862 billion.

Q4: 2.276 billion free cash flow, + 664 million (Q2 hedge loss, no hedge after Q3) + 177 million (2022Q2 payment to Conoco) = 3.042 billion

There is still missing 70.6-28.62-30.42=1.156 billion.

If the average oil price stays at $100, even the debt target will not be met by the end of December 2022 . It will be reached by the end of January 2023. I have not count that 2022 Q2 oil sands production, refineries are affected by annual maintenance. In the second half of the year, oil production will increase by roughly 30,000 barrels per day, and refineries will increase utilization.
Hope to have a special bonus at that time. 100% of free cash flow is returned to shareholders through buybacks and dividends. A year is about 12 billion. The current market value in Canadian is 46.5 billion. The one-year return is 12/46.5=25.8%.

Risks: 1. The world economy in recession, oil prices drop significantly. 2. The company has been planning to buy several U.S. refinery assets that it has 50% interest, affecting shareholder return plans.

Disclosure of interests, I hold a heavy position in Cenovus Energy (CVE)

When I first got here @ $6.09, there were also a lot of bumps along the way up as well, while looking at the other oil stocks take off to the skies. But holy smoking gun, calm down! If you can't stomach this pain, you guys better get out of the boat and dive to the abyss. No one still knows what's going to happen with the oil price in the coming several months. Effff demand destruction, winter is coming in a few months, the supply is still struggling to cope up with the demand, with or without the demand destruction. Get lost if you aren't prepared for this. Even at my lowest estimate, if CVE makes it to only a dismal 150% in 10 years, it is still a winner! This is not a blackjack type of stock, where you sit on the table, hit a 21 and take off. This is a long play album. I'm just shaking my #$%$ head with all these negative comments. You are not an investor if you just see the picture on a daily movement. Shaggg.

wow :)

-----Generated cash from operating activities of nearly $3.0 billion, adjusted funds flow of $3.1 billion, free funds flow of $2.3 billion and excess free funds flow of approximately $2.0 billion.

-----Reduced long-term debt, including current portion, to $11.2 billion and net debt to $7.5 billion at quarter end.