DBRS Confirms Ratings of Cenovus Energy Inc.

DBRS Limited (DBRS) has confirmed the Issuer Rating and 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 the Company’s operational ability, capital flexibility and balance sheet capacity to withstand an extended pricing downturn while remaining in line with its current ratings range.

Cenovus remains on track to bring new production online more efficiently than many of its oil sands peers. The Company’s operating costs in its oil sands operations is among the lowest in the industry (approximately $11.20 per barrel for Christina Lake and $16.55 per barrel for Foster Creek in 2014). These low-cost operations provide significant support to the Company’s credit risk profile which is expected to improve further as production from the expansion phases at these high netback projects ramps up.

The ratings take into account Cenovus’ efforts to build up additional equity based cushion, given the current low price environment. In February 2015, the Company raised $1.5 billion from a common equity issuance through a bought-deal transaction to reduce indebtedness and to build an additional cash buffer during times of high uncertainty. Cenovus also reduced its 2015 capital budget by more than 30% to $1.9 billion from more than $3.0 billion spent in 2014. As at YE2014, the Company has approximately 15% of its crude oil production hedged at significantly higher prices and approximately one third of its natural gas production hedged at above-market prices.

With the weak pricing outlook for both oil and natural gas, DBRS-rated investment-grade energy companies including Cenovus were all stress tested under various crude oil and natural gas pricing points for a three-year time period, with West Texas Intermediate prices as low as $40.00 per barrel and natural gas prices as low as $2.50 per thousand cubic feet. The stress tests focused on the effect of energy prices on: (1) internally generated cash flow, (2) discretionary versus committed capital expenditures (capex), (3) dividend flexibility, (4) asset dispositions, (5) available liquidity and (6) key credit metrics.

Issuing equity in conjunction with reduced capex reflects the Company’s commitment to maintaining a reasonable balance sheet and to protecting its credit ratings. With the proceeds from the equity issuance providing a material buffer for the Company in managing its capex and dividends without relying on additional leverage during a low price environment, DBRS expects Cenovus’ key credit metrics to remain in line with its rating range. Cenovus ratings are, however, more vulnerable than other integrated peers rated in the “A” range because of its above-average leverage. Negative rating action will be warranted if there is a sustained deterioration in the Company’s liquidity and key credit metrics where adjusted debt-to-capitalization weakens to beyond 40% and total debt-to-cash flow deteriorates to near 2.0 times (x). Assuming that $1.5 billion equity issuance proceeds are used to reduce debt, pro forma YE 2014 adjusted debt-to-capitalization would improve to 28.3% and total debt-to-cash flow would improve to 1.18x from 37.5% and 1.63x, respectively.

Cenovus has sufficient liquidity to comfortably fund its 2015 capex and dividends with cash on hand ($0.9 billion as of December 31, 2014) and proceeds from the recent common equity issuance ($1.5 billion in February 2015). DBRS, therefore, does not expect Cenovus to issue any new debt in 2015.

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 methodologies are Rating Companies in the Oil and Gas Industry (October 2014) and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (February 2014), which can be found on our website under Methodologies.