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

DBRS, Inc. (Morningstar DBRS) 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). The trends on all credit ratings are Stable.

KEY CREDIT RATING CONSIDERATIONS
The confirmations and Stable trends reflect Morningstar DBRS' view that no material changes to Cenovus's credit fundamentals are expected in the near term. The Issuer Rating is based on Cenovus's (1) superior size as one of Canada's largest integrated energy companies; (2) long-life, low-decline, and low-sustaining capital oil sands projects plus contracted production in the Asia-Pacific region; (3) integrated upstream and downstream operations enabling it to capture margin across the entire value chain; (4) diversified refined product mix; and (5) significant financial and capital spending flexibility. The key business risk factors affecting the credit ratings include (1) dependency on a high concentration of heavy and thermal crude oil-producing assets in Western Canada, (2) exposure to the light-heavy crude oil pricing differential, and (3) escalating compliance and cost pressures related to expanding environmental regulations.

CREDIT RATING DRIVERS
Morningstar DBRS does not expect to take a positive credit rating action in the near term. However, Morningstar DBRS may consider an upgrade if, in combination with a strengthening of both Cenovus's business risk profile and downstream operating performance, the Company improves its lease-adjusted debt-to-cash flow ratio to consistently around 1.0 times (x). Conversely, Morningstar DBRS may consider a negative credit rating action if oil and gas prices, or Cenovus's operating performance and/or credit metrics, materially weaken to a level that is inconsistent with the Company's BBB (high) credit ratings.

EARNINGS OUTLOOK
Looking ahead, Morningstar DBRS forecasts an approximately 4% increase in Cenovus's upstream production to 820,000 gross barrels of oil equivalent per day (boe/d) in 2025 from an estimated 790,000 gross boe/d in 2024. The forecast increase in production will largely be driven by the optimization project at the Sunrise steam-assisted gravity drainage (SAGD) in situ oil sands operation, the Narrows Lake tieback to the adjacent Christina Lake SAGD in situ oil sands operation, the ongoing development of Lloydminster conventional heavy oil assets, and continued efficiency gains across other Company upstream projects. Additionally, the Company's focus on improving the reliability of downstream operations should gradually increase utilization and refined product output. However, Morningstar DBRS forecasts Cenovus's consolidated gross revenue to sequentially decline by 2% to 3%, to between $53.0 billion and $54.0 billion, and for the EBITDA margin to slightly decline to 18% to 19% in 2025. The increase in forecast annual upstream and downstream production and reduction in unit operating costs that Morningstar DBRS incorporates for 2025 are offset by a lower crude oil price assumption. Morningstar DBRS' base-case commodity price assumptions can be found in the commentary "Geopolitical Angst Continues to Support Crude Prices, Excess Inventory Persists in Gas Market" (October 17, 2024) at https://dbrs.morningstar.com/research/441330.

FINANCIAL OUTLOOK
Cenovus's 2025 total preliminary capital expenditure (capex) estimate is $4.5 billion to $5.0 billion. Based on its base-case commodity price assumptions, Morningstar DBRS forecasts that Cenovus will generate a significant free cash flow (FCF) (i.e., cash flow after capex and dividends) surplus in 2024 through 2026. As of September 30, 2024, total debt was $7.3 billion. Although Morningstar DBRS expects Cenovus to allocate nearly 100% of its future FCF surplus to share repurchases, Morningstar DBRS forecasts that the Company will maintain a lease-adjusted debt-to-cash flow ratio of around 1.5x through 2026, supporting the credit ratings. Cenovus's liquidity is strong with $3.1 billion of cash and cash equivalents and available committed credit facilities totaling $5.5 billion at September 30, 2024.

CREDIT RATING RATIONALE
Cenovus's upstream segment has holdings in large, long-life, low-decline oil sands operations and upgrading facilities with low sustaining capital requirements. Reinforcing that, the Company continuously focuses on cost-reduction measures, including the ongoing pursuit of operating and capital efficiency improvements--for example, optimization of upstream oil sands projects and improving the reliability of refining operations--in an effort to maximize the value from its existing assets. Cenovus's downstream operations often achieve higher margins during times of low oil and gas prices, partially offsetting the decline in upstream income. As a large U.S. and Canadian refiner with significant U.S. Midwest retail market share in fuel products, the Company is well served by integration.

These credit rating confirmations follow several operational accomplishments by Cenovus in 2024, including completion of four major planned turnarounds--two upstream and two downstream--three of which were on or ahead of schedule; progress on the Sunrise oil sands growth program; advancement of the Narrows Lake pipeline tieback to the Christina Lake oil sands facility; ongoing optimization of the Foster Creek SAGD in situ oil sands operation; and advancement of the West White Rose project in Atlantic Canada that remains on schedule for startup in 2026, among others.

Morningstar DBRS forecasts that Cenovus will maintain a lease-adjusted debt-to-cash flow ratio at around 1.5x, commensurate with the BBB (high) credit rating range and supporting the Stable trends. Cenovus's liquidity is strong with $3.1 billion of cash and cash equivalents and available committed credit facilities totaling $5.5 billion at September 30, 2024.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

Environmental (E) Factors
The following environmental factor had a relevant effect on the credit analysis:

Morningstar DBRS considered carbon and greenhouse gas (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 exposure to more carbon-intensive oil sands developments. Cenovus's balance sheet strength and ongoing emission-reduction initiatives provide it with the 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 Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)

(A) Weighting of BRA Factors
In the analysis of Cenovus, the BRA factors were considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of Cenovus, the FRA factors were considered in the order of importance contemplated in the methodology.

(C) Weighting of the BRA and the FRA
In the analysis of Cenovus, the BRA carries greater weight than the FRA.

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

Morningstar DBRS applied the following principal methodology:

-- Global Methodology for Rating Companies in the Oil & Gas, Oilfield Services, Pipeline, and Midstream Energy Industries (August 12, 2024), https://dbrs.morningstar.com/research/437739

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024; https://dbrs.morningstar.com/research/431186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodology has also been applied:

-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781

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

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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.

Morningstar DBRS 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. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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