DBRS Finalizes Rating of Cenovus Energy Inc. at A (low), Stable Trend

DBRS has today finalized the provisional rating of A (low), with a Stable trend, assigned to the Senior Unsecured Debt of Cenovus Energy Inc. (Cenovus or the Company). The rating action follows the closing today of the spin-off (the Transaction) of the Integrated Oil and Canadian Plains divisions of EnCana Corporation (EnCana) into Cenovus, a recently established entity. The provisional rating was assigned on September 10, 2009, when the Transaction was announced.

The Transaction has proceeded as expected. The assigned rating reflects Cenovus’s stated objective to initially pursue the same financial strategy and use the same credit metric targets as EnCana employed, pre-Transaction. The Company is appropriately capitalized for its business model and growth strategy. The metric targets include a debt-to-capital ratio of 30% to 40% and a debt-to-EBITDA ratio of 1.0 times to 2.0 times. DBRS expects Cenovus to manage within the lower half of these ranges in order to maintain financial flexibility for the current rating in a weak economic environment. DBRS estimates pro forma ratios (on a DBRS-defined basis) of 28% and 1.3 times, respectively (debt-to-cash flow of 1.2 times) at September 30, 2009. Post-Transaction, in Q4 2009, Cenovus will initially maintain a 50% share of EnCana’s dividend of $1.60 per share annually.

Cenovus issued US$3.5 billion worth of senior unsecured notes through a private placement in September 2009, the proceeds of which were held in escrow and used to pay for the assets acquired at the Transaction’s closing today as expected. Its liquidity position is also enhanced by its $2.0 billion three-year revolving credit facility and a $500 million 364-day revolving credit facility.

While cognizant of Cenovus’s reduced economies of scale (relative to when it was included in EnCana) in a weak natural gas pricing environment (Cenovus is about 45% oil-weighted) and its intention to pursue a substantial capital expenditure program (although considerably reduced in size compared with the May 2008 proposed spin-off), DBRS expects Cenovus’s rating will be supported by its operational expertise, capital discipline, one of the lowest cost structures relative to its peers and the benefits of its consistent and active hedging programs. Cenovus currently has hedges covering close to 45% of its forecast 2010 production, with about 400 million cubic feet per day (mmcf/d) of gas volumes to October 2010 at slightly more than $6 per thousand cubic feet (mcf) and about 24,000 barrels per day (b/d) of crude oil production at an average fixed WTI (West Texas Intermediate) price of about $77 per barrel. These hedges should provide a measure of stability to earnings and cash flow in the near term as the Company layers in more hedges over time.

Cenovus remains of critical mass in terms of size and scope compared with its peers, representing a one-third share of EnCana’s production and reserves, pre-Transaction, with pro forma volumes estimated at approximately 248,000 barrels of oil equivalent per day (boe/d) and 1.2 billion boe in proved reserves at December 31, 2008. The combination of high-growth assets and strong cash flow generating resources should enable the management team to focus on developing the underlying resource base – the enhanced oil recovery oil sands properties. While Cenovus’s portfolio will require relatively high capital investments over the next few years, there will be minimal exploration risk compared with conventional crude oil and gas developments. Cenovus will benefit from the joint venture with ConocoPhillips (COP) through the integration of its enhanced oil recovery oil sands properties and the downstream upgrading and refining operations, resulting in relatively low capital costs, currently estimated by DBRS at $40,000 to $ 50,000 per b/d of synthetic crude oil capacity, compared with the more than $100,000 per b/d previously estimated for projects by other oil sands participants.

Cenovus is an integrated oil and gas company with enhanced oil recovery oil sands properties in western Canada and interests in two refineries in the United States through its joint venture with COP, supported by mature oil and gas properties in western Canada (primarily in Alberta and Saskatchewan).

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Oil and Gas Companies, which can be found on our website under Methodologies.

This is a Corporate (Energy) rating.