Cenovus Energy: Market's Overreaction To Weak Q4 Serves Up A Buying Opportunity

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Cenovus Energy Inc. (NYSE:CVE) investors woke up this greeting to an disfigured Q4 net report. The institution missed expert expectations for costs from operations ("FFO") per stock by 6%, reporting C$1.17 versus expectations of C$1.24. The miss was driven by lower-than-expected lipid sands income volumes, a larger-than-expected rate taxation payment, and an unusually anemic capacity from CVE's U.S. refineries. The news sent CVE shares plunging arsenic overmuch arsenic 9% soon aft nan unfastened earlier they rebounded later successful nan time to adjacent astatine $18.46, down 4.9%.

In summation to nan costs from operations miss, Q4 capex came successful 17% higher than statement expectations. The marketplace is peculiarly delicate to E&P capex increases, arsenic witnessed by nan thrashing it delivered to Devon Energy Corporation (DVN) shares yesterday, mostly successful consequence to its outlook for higher capex. CVE's Q4 higher capex also reduced free rate travel disposable for dividends and stock repurchases. Consequently, its Q4 free rate travel fell 23% beneath expectations. The little free rate travel constricted quarterly buybacks to C$387 million, versus C$2.14 cardinal complete nan erstwhile 9 months.

Operational results were besides weak. While Q4 accumulation results were successful line, astatine 807,000 boe/d versus expectations of 810,000 boe/d, lipid sands income volumes disappointed by search 18,000 boe/d little than accumulation volumes. For nan downstream segment, refinery throughput was broadly successful statement pinch expectations.

Capital allocation was different sore spot. As little commodity prices, operational disruptions, and a severely discounted WCS acted arsenic a resistance connected rate flow, CVE grounded to meet management's C$4 cardinal nett indebtedness target by year-end 2022. Moreover, a C$1.2 cardinal rate taxation costs and a $300 cardinal costs toward nan acquisition of 50% of nan Toledo refinery will summation nan company's Q1 nett indebtedness balance. As a result, guidance now expects its C$4 cardinal nett indebtedness target to beryllium deed astatine nan extremity of Q3, two-to-three quarters later than what it had guided and what nan marketplace had expected earlier CVE announced Q4 results. The C$4 cardinal nett indebtedness target represents nan displacement from paying retired 50% of excess free rate travel to shareholders to 100% of excess free rate flow. No uncertainty guidance disappointed galore shareholders by pushing backmost nan presence of higher dividend and/or stock repurchases.

And to apical it each off, CVE announced an unexpected guidance modulation that will spot its highly-regarded CEO, Alex Pourbaix, modulation to an executive president role. Pourbaix is turning complete nan CEO domiciled to Jonathan McKenzie, CVE's Chief Operating Officer.

The lone agleam spot successful Q4 results was CVE's Canadian refinery financial results, which benefitted from nan blowout successful WCS differentials.

Q4 Results Were Not As Bad As The Ongoing Selloff Implies

As bad arsenic Q4 header results were, they were caused by one-time items improbable to repeat. In nary measurement do they awesome a problem pinch CVE's underlying business. In fact, we judge CVE's business results person already begun to inflect successful a affirmative direction.

CVE's Q4 revenues declined owed to little commodity prices, which we judge will beryllium short-term successful nature, and a blowout of WCS differentials that has already corrected toward historically normal levels. Furthermore, nan diminution successful fourth-quarter costs from operations per stock was exacerbated by a ample moving superior tie attributable to a alteration successful accounts receivable and an summation successful taxes payable. These are lumpy rate travel items that happened to move against nan institution successful nan 4th quarter. Their quarterly fluctuations person nary base connected CVE's intrinsic value.

Consider further that nan 18,000 bpd quality betwixt Q4 accumulation volumes and income volumes was attributable to management's determination to throttle backmost income volumes arsenic WCS prices plunged comparative to WTI. Management opted to forego income into a distressed marketplace successful bid to hold for much favorable pricing conditions. While nan move wounded Q4 financial results, it's nan benignant of subject we for illustration to spot arsenic semipermanent shareholders. Such long-term-oriented behaviour is uncommon among E&Ps, and it demonstrates CVE's superior operating level and value-conscious management.

The U.S. refinery conception was partially to blasted for nan Q4 financial underperformance. However, nan refinery operating and financial disappointments were attributable to events extracurricular of management's control. For example, U.S. refinery throughput took a deed from nan outage connected TC Energy's (TRP) Keystone Pipeline successful December, arsenic these refineries person a information of their crude feedstock done Keystone. The upstream broadside saw little of an impact, arsenic CVE compensated for nan nonaccomplishment of Keystone by ramping up crude-by-rail shipments done its Bruderheim obstruction terminal.

CVE's downstream conception was negatively impacted by terrible weather, unplanned operational events, and nan Keystone outage-all of which are improbable to repeat. Management reported that by mid-January, each but 1 of CVE's refineries were moving astatine normal rates. The straggler, nan Wood River refinery, is expected to beryllium operating astatine normal rates by Q2.

CVE is group to participate nan 2nd 4th pinch each its refineries moving astatine aliases adjacent normal throughput rates. Later this month, it will get nan 50% liking successful nan Toledo refinery it doesn't already own. The refinery had been unopen down aft it was damaged successful a occurrence successful September, and guidance expects it to beryllium moving astatine afloat rates successful Q2. In addition, CVE's Superior refinery, which was idled successful 2018, has been rebuilt and will statesman ramping throughput complete nan adjacent fewer weeks.

CVE will use importantly from accrued refinery throughput, peculiarly since refining margins are apt to stay elevated arsenic agelong arsenic refined merchandise request remains robust. For perspective, successful 2022, CVE's Canadian refinery throughput averaged 92,900 bpd, and its U.S. throughput averaged 400,800 bpd. For 2023, guidance is guiding to Canadian refinery throughput of 105,000 bpd and U.S. refinery throughput of 530,000 bpd.

Refineries person precocious fixed costs, truthful declining throughput squeezes per-barrel margins. Conversely, rising throughput boosts margins and rate flow. The Toledo and Superior refineries person been nether construction. They person been generating nary revenue, yet their operating costs tally much than C$40 cardinal per month. As their throughput increases complete nan coming months, their publication to CVE's financial results will flip from a resistance to a tailwind.

Lastly, CVE's superior allocation disappointment was besides amended than it looked astatine first glance. During today's conference call, guidance reassured shareholders that it was laser-focused connected achieving its C$4 cardinal nett indebtedness target. Its revised Q3 target day is based connected existent lipid prices remaining flat. We expect lipid prices to summation opening successful Q2, and higher lipid prices make it apt that CVE will execute its indebtedness target earlier than management's guidance. We judge a mid-year target is much probable, which would correspond a hold of one-to-two quarters. While inconvenient, this shouldn't beryllium a awesome interest for semipermanent shareholders.

Conclusion

We noticed that immoderate disgruntled CVE shareholders compared nan company's Q4 miss to that of Devon Energy. This is an apples-to-bananas comparison. DVN missed connected Q4 accumulation and guided to higher capex successful 2023. Its results propose it whitethorn beryllium struggling to prolong its capacity connected nan shale treadmill. We position nan guidance to DVN's results arsenic a logical consequence to an inferior business model. Our first thought erstwhile we saw DVN's results is that it should ne'er person disposed of its lipid sands properties successful 2019.

By contrast, Cenovus Energy Inc.'s Q4 disappointment does not connote thing antagonistic astir its semipermanent economics. The terrible marketplace reaction, therefore, makes small sense. We expect amended quarterly results going guardant and position nan existent Cenovus Energy Inc. weakness arsenic an charismatic buying opportunity for semipermanent investors.