DBRS Confirms Cenovus Energy Inc. at BBB (high), Maintains Negative Trend

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Debt rating of Cenovus Energy Inc. (Cenovus or the Company) at BBB (high) and the Company’s Commercial Paper (CP) rating at R-2 (high). All trends remain Negative. The rating confirmation reflects the Company’s integrated operations, capital flexibility, ample liquidity, leading position as a developer of low-cost steam-assisted gravity drainage oil sands projects and long proven reserve life of 25 years. The Negative trend takes into account the erosion in the Company’s key credit metrics as a result of the weak, albeit improving, oil pricing environment.

Cenovus is one of the most efficient oil sands developers in Canada. The Company’s combined operating costs and corporate finding and development costs are among the lowest in the industry. Nevertheless, netbacks for the Company’s oil sands volumes in 2015 and through the early part of 2016 have contracted sharply because of the significant drop in the price of heavy oil. The decline in oil pricing has resulted in a significant squeeze on the Company’s cash flow and profitability. In Q1 2016, with WTI oil averaging about USD 33/barrel (bbl) coupled with weak refining margins, Cenovus reported less than breakeven cash flow. DBRS notes that the Company’s hedging program has mitigated the decline in cash flow, and that the Company’s integrated operations, with interests in two refining joint ventures in the United States, have provided some measure of stability and a natural hedge.

The Company has taken significant steps to reduce the level of net indebtedness with the (1) sale of the Company’s royalty and mineral fee interests for approximately $3.3 billion in cash and (2) a $1.5 billion equity offering both completed in 2015. The additional funds coupled with Cenovus’ efforts to reduce operating costs, cut the dividend and scale back capex have enabled the Company to strengthen its balance sheet and improve the liquidity profile. At the end of Q1 2016, Cenovus had a cash position of $3.9 billion, $4.0 billion of credit facilities that were undrawn, and no debt maturities until 2019. DBRS’s ratings take into account Cenovus’ sizable “liquidity buffer” to weather a period of weak oil pricing.

However, the reduction in cash flow has outpaced the Company’s efforts to reduce debt, resulting in weaker credit metrics. For the 12 months ending March 31, 2016, the Company’s lease-adjusted debt/cash flow ratio was 5.59 times (x) versus 1.81x for F2014, and the net debt/cash flow ratio was 1.96x (versus 1.37x for F2014). The lease-adjusted EBIT interest coverage ratio over the 12 months ending March 31, 2016, was negative, and the lease adjusted debt/capital ratio was 36.3% (within the BBB range). Based on budgeted capex of $1.25 billion (the midpoint of guidance) for 2016, DBRS expects that, at a WTI oil price of close to USD 50/bbl or more, the Company can produce a cash flow surplus (cash flow after capex and dividends), and that the financial profile should steady. Should the price of oil stabilize above USD 50/bbl WTI, DBRS likely will change all trends to Stable from Negative.

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.

The applicable methodologies are Rating Companies in the Oil and Gas Industry (September 2015) and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Financial Issuers (April 2016), which can be found on our website under Methodologies.

This rating was initiated at the request of the rated entity.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.