DBRS Changes Trend on Cenovus Energy Inc. to Stable from Negative, Confirms Ratings at BBB

DBRS Limited (DBRS) changed the trend on the Issuer Rating and Senior Unsecured Debt rating of Cenovus Energy Inc. (Cenovus or the Company) to Stable from Negative and confirmed each rating at BBB. The confirmation of the ratings takes into account: (1) the Company’s sizable production base in Western Canada (447,000 barrels of oil equivalent/day in the first quarter of 2019) coupled with its joint venture interests in two U.S. mid-continent refineries (241,000 net barrels (bbl)/day of capacity); (2) long-life low-decline oil sands reserves; (3) high level of capital flexibility and highly efficient oil sands operations; and (4) downstream integration, which tempers the impact of oil-price volatility and changes in the heavy-light oil-price differential. Factors moderating the ratings include a high cash flow/earnings sensitivity to the Western Canadian heavy-light oil-price differential and highly concentrated Western Canadian production base geared to oil sands development. The trend change to Stable from Negative reflects DBRS’s higher degree of confidence that Cenovus’s actions following its 2017 acquisition of Western Canadian assets from ConocoPhillips (rated A (low) with a Stable trend by DBRS) should lead to significant strengthening in its credit profile within the next two years, which will support a BBB rating.

Following the 2017 acquisition, the Company’s financial leverage rose materially. At that time, DBRS downgraded Cenovus’s ratings by one notch and changed the trend to Negative to reflect uncertainty about the Company’s ability to reduce leverage adequately to support a BBB rating. Since then, Cenovus has executed and completed a plan to sell assets, including its legacy assets in Western Canada; focused on cost-reduction measures; improved capital efficiencies; and restrained capital spending (capex). Deleveraging remains the Company’s primary goal with a near-term target to reduce net debt to $7.0 billion ($8.1 billion at March 31, 2019) and a longer-term target of $5.0 billion. Cenovus has also enhanced its capability to generate free cash flow (FCF) surpluses (cash flow after capex and dividends) with measures to increase efficiencies at its key oil sands developments, coupled with a disciplined approach toward capital allocation. For 2019, the Company plans $1.2 billion to $1.4 billion of capex in line with estimated sustaining capex of $1.0 billion to $1.2 billion. At DBRS’s base-case West Texas Intermediate oil price of USD 55/bbl, DBRS believes that the Company should be able to generate considerable FCF surpluses in 2019 and 2020 (close to $2 billion per year), which can reduce leverage to support a BBB rating. With $4.5 billion of undrawn credit facilities and $0.24 billion of cash as at March 31, 2019, DBRS considers Cenovus’s liquidity to be sufficient. Over the next four years, the Company has USD 1.0 billion of debt maturing, including USD 0.5 billion in October 2019.

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

The principal methodology is Rating Companies in the Oil and Gas and Oilfield Services Industries (August 2018), which can be found on dbrs.com under Methodologies & Criteria.

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 under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

DBRS will publish a full report shortly that will provide addi¬tional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

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