DBRS Comments on the Downgrades and Trend Changes to Cenovus Energy Inc.

DBRS Limited (DBRS) has today downgraded the Issuer Rating and Senior Unsecured Debt rating of Cenovus Energy Inc. (Cenovus or the Company) to BBB (high) from A (low), and its Commercial Paper rating to R-2 (high) from R-1 (low) (see DBRS press release titled, “DBRS Reviews Ratings of Oil & Gas Portfolio”). The trend has been changed to Negative from Stable. The downgrades reflect the significant erosion in the Company’s key credit metrics well beyond the A (low) rating range as a result of lower oil prices. The Negative trend reflects the expectation of continued credit metrics erosion over the next 12 months without a material improvement in oil and gas prices, which is viewed to be challenging in a prolonged low pricing environment.

At the last 12 months ending September 2015 (LTM), when factoring in the Company’s cash balance the net debt-to-cash flow was 1.46 times. The lease-adjusted debt-to-cash low ratio was 5.12 times (versus 1.80 times in 2014). As oil prices have declined further the Company’s credit metrics have weakened significantly below the A (low) rating range. The Company has a high sensitivity to oil price changes and approximately 55% of the Company’s projected equivalent production in 2016 is from oil sands where margins have been severely squeezed. Favourable pricing on hedges for a portion of the Company's 2016 estimated crude oil production should moderate the impact of low oil prices somewhat. However, the Company has no hedges on 2017 production to provide a cushion if prices remain low or fall further.

Cenovus in 2015 raised funds from asset sales and the proceeds from an equity issuance. As a result, the Company has a good liquidity position to withstand an extended period of weak pricing. As at 9M 2015, the cash position was $4.4 billion, total debt was $6.3 billion and there are no long-term maturities until 2019. The Company also has $4.0 billion of undrawn credit facilities available.

The Company in December announced a capex budget of USD 1.4 billion to USD 1.6 billion to be largely funded from internally generated cash flow based on a West Texas Intermediate oil price of USD 49 per barrel. With a much weaker oil price environment and high oil price sensitivity, DBRS expects that the budget may be reset to prevent draining liquidity and increasing financial leverage. If the price of oil remains low for an extended period of time and/or the Company does not take continued measures to improve its financial metrics, DBRS could take further rating actions.

The BBB (high) rating factors in Cenovus’s advantage of being one of the lowest cost oil sands operators in Canada. The Company also has a long reserve life index (over 20 years for proven reserves). Furthermore, Cenovus’s heavy oil operations have benefited from downstream integration through two joint venture agreements with two U.S.-based refineries.

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

The applicable methodologies are Rating Companies in the Oil and Gas Industry (September 2015) and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (April 2015), which can be found on our website under Methodologies.