DBRS Morningstar Confirms Issuer Rating and Senior Unsecured Debt Rating on Cenovus Energy Inc. at BBB (high) and Preferred Shares Rating at Pfd-3 (high), Stable Trends

DBRS, Inc. (DBRS Morningstar) confirmed Cenovus Energy Inc.’s (Cenovus or the Company) Issuer Rating and Senior Unsecured Debt credit rating at BBB (high) as well as its Preferred Shares credit rating at Pfd-3 (high). All trends remain Stable. This confirmation follows several of the Company’s operational accomplishments in the past year, including its assumption of full ownership of the Toledo Refinery, restart of the Superior Refinery, completion of the Foster Creek turnaround, and the Sunrise redevelopment program, among others. The Stable trends reflect DBRS Morningstar's expectation that Cenovus’ ongoing reduction in gross debt will allow it to maintain a lease-adjusted debt-to-cash flow ratio at around 1.50 times (x) under DBRS Morningstar's base-case commodity price assumptions (see DBRS Morningstar’s commentary, “As Crude Oil Prices Climb the Wall of Worry, Energy Credit Quality Trends Positively,” dated October 10, 2023).

For the first nine months of 2023, Cenovus paid down $1.57 billion of debt and plans to allocate up to 50% of the expected future excess free funds flow (cash flow less capital expenditures (capex), base dividends on common and preferred shares, decommissioning liabilities, and principal repayment of leases, plus proceeds from asset divestitures) surplus to net debt reduction until the Company achieves net debt (i.e., debt excluding operating leases and netting out of cash) of $4.0 billion. At September 30, 2023, net debt was $5.98 billion. DBRS Morningstar forecasts excess free funds flow generation with which to continue voluntary net debt reduction. Additionally, DBRS Morningstar believes that balance sheet strengthening provides Cenovus with the financial flexibility to address challenges and costs associated with meeting new federal greenhouse gas (GHG) emission-reduction targets that are currently under consideration.

Cenovus’ business risk profile remains strong, underpinned by its (1) significant size (total upstream production of 797,000 barrels of oil equivalent per day (Mboe/d) and total upgrader/refinery throughput of 664,300 barrels (bbl) per day in Q3 2023); (2) integrated upstream and downstream operations; and (3) long-life, low-cost Foster Creek and Christina Lake oil sands operations plus contracted production in Asia-Pacific. DBRS Morningstar expects the Company to maintain its business risk profile with a modest increase in near-term production driven by optimization/debottlenecking projects in both its oil sands and conventional operations. Looking ahead, brownfield oil sands expansions and first oil from the West White Rose (WWR) project in the Atlantic should support incremental production growth in 2025−2028. The potential to capture additional synergies between Cenovus’ Lima and Toledo, Ohio, refineries should drive near-term efficiency gains and enhance reliability in downstream operations. The Company’s business risk profile remains constrained by its dependency on a high concentration of lower-margin heavy and thermal oil-producing assets in Western Canada.

Cenovus expects production in 2024 to average about 790 Mboe/d with capex estimated to range from $4.5 billion to $5.0 billion. While capex in 2024 will increase relative to 2023 because of capital committed to be spent on the WWR project and cost inflation, it also includes a growth/discretionary component of about $800 million (excluding the WWR), which can be reduced if necessary. DBRS Morningstar expects the Company to generate a material free cash flow (i.e., cash flow after capex and dividends) surplus in 2024 and 2025, despite DBRS Morningstar’s expectation that the West Texas Intermediate price of crude oil will decline to the middle of DBRS Morningstar’s midcycle pricing band of USD 50 to USD 70 per barrel (/bbl) during this period. The Company’s liquidity position should remain strong, with committed credit facilities totaling $5.5 billion remaining largely undrawn through the forecast period.

DBRS Morningstar may consider a positive credit rating action if the Company reduces gross debt and improves its lease-adjusted debt-to-cash flow ratio to consistently around 1.00x. Conversely, DBRS Morningstar may consider a negative credit rating action if oil prices weaken materially (below USD 45/bbl) and credit metrics weaken for an extended period.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Environmental Factors
DBRS Morningstar considered carbon and GHG costs as a relevant environmental factor for Cenovus. This factor is relevant because ever-increasing environmental regulations in Canada targeting the reduction of GHG emissions will likely limit the growth potential and add costs for all oil and gas companies in Canada and in particular for Cenovus, which has greater exposure to more carbon-intensive oil sands developments. Cenovus is in a stronger position today to face the challenges associated with reducing GHG emissions than it was a few years ago. Cenovus has deleveraged its balance sheet to provide much-needed financial flexibility to navigate the energy transition path.

There were no Social or Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (July 4, 2023).

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

DBRS Morningstar applied the following principal methodology:
-- Global Methodology for Rating Companies in the Oil and Gas and Oilfield Services Industries (August 16, 2023), https://www.dbrsmorningstar.com/research/419228/global-methodology-for-rating-companies-in-the-oil-and-gas-and-oilfield-services-industries.

The following methodologies and criteria have also been applied:
-- DBRS Morningstar Global Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (October 19, 2023), https://www.dbrsmorningstar.com/research/422134/dbrs-morningstar-global-criteria-preferred-share-and-hybrid-security-criteria-for-corporate-issuers.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and credit ratings are under regular surveillance.

Information regarding DBRS Morningstar credit ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at [email protected].

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