DBRS Confirms Cenovus Ratings at A (low), R-1 (low), Trends Stable

DBRS has today confirmed the Issuer Rating and the Senior Unsecured Debt rating of Cenovus Energy Inc. (Cenovus or the Company) at A (low), and the Company’s Commercial Paper rating at R-1 (low). All trends are Stable. The rating confirmations reflect Cenovus’s ability to grow its future production while still maintaining reasonable financial metrics for its current ratings.

Cenovus’s business risk profile is considered A (low), supported by its above-average reserve quality, long reserve life (approximately 24 years) and integrated operations, which provide natural hedges against volatile light/heavy oil price differentials. A superior reserve quality has allowed the Company to maintain one of the lowest cost bases in terms of capital and operating efficiencies among oil sands producers. As a result, the Company is better placed to withstand a softening pricing environment and has the ability to ramp up production on time and within budget. The Company’s steam-to-oil ratio (a key operating measurement) in its oil sands operations is among the lowest in the industry – approximately 1.8:1 for Christina Lake and 2.5:1 for Foster Creek in 2013. Furthermore, DBRS notes the flexibility in Cenovus’s capital investment program, whereby one-third of the capex is discretionary, which provides the Company with the buffer to match its anticipated cash flow with capital investments and to reduce its reliance on external funding if necessary. These strengths mitigate the Company’s relatively small size and limited geographical diversification compared with its A (low)-rated peers.

The Company’s financial risk profile has remained somewhat weak for the A (low) rating category and is more reflective of a BBB (high) rated entity, with (1) an adjusted debt-to-capitalization ratio of 36% as at December 31, 2013 (35% to 45% for a BBB-rated entity versus 25% to 35% for an A-rated entity); (2) a total debt-to-cash flow of 1.4 times (x) (1.5x to 2.0x required for BBB versus 1.0x to 1.5x for “A”); and (3) EBIT interest coverage of 7.60x (5.0x to 10.0x for BBB versus 10x to 20x for “A”). Any further deterioration in the financial metrics could result in negative rating actions.

While capex is forecast to decrease by approximately 10% from the 2013 level, the 2014 capital spending budget set at $2.8 billion to $3.1 billion is expected to be adequate to support the company’s medium-term oil sands production growth - expected to reach 248,500 barrels per day net (+140%) by 2017. Operating cash flow is expected to be sufficient to fund capex in 2014. Dividend of approximately $800 million is to be funded by cash on hand in 2014. As a result, debt outstanding is expected to remain unchanged, and key financial metrics are expected to remain relatively stable for 2014.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

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