DBRS Confirms Cenovus Energy Inc. at A (low), R-1 (low), Stable Trends

DBRS has today confirmed the ratings of the Senior Unsecured Debt and Commercial Paper of Cenovus Energy Inc. (Cenovus or the Company) at A (low) and R-1 (low), respectively, both with Stable trends. The rating confirmations reflect Cenovus’ strong financial profile, integrated operations, and consistent operating performance, largely driven by its strong track record of oil sands development and production. The Company’s oil sands project execution and capital/operating efficiency levels to date have been among the best in the oil sands sector.

The Company’s financial profile improved in 2011. It remains below its target debt-to-capital range of 30% to 40% (27.3% in 2011), largely driven by strong oil price realizations, liquids production growth and higher refining margins. DBRS expects the Company to gradually return to its targeted range through cash-flow deficits resulting from significantly increased capital spending during its aggressive growth phase. Credit metrics may face some short-term negative pressure as a result of increased capex spending: however, the Company maintains adequate liquidity through its credit facility and cash to fund near-term obligations.

Cenovus’ considerable capital expansion plans (specifically targeting oil sands production) have initially been funded largely through operating cash flow from mature producing conventional oil and natural gas resources. As a result of the Company’s phased approach to expansion, which DBRS views as financially responsible, less reliance will be placed on declining conventional cash flows, as Cenovus strategically manages natural gas production. Incremental cash flows from oil sands production should begin to fund expansion in the near future. As a result of this phased expansion approach, DBRS expects only modest external financing to be required to fund this growth, assuming crude oil prices remain favourable. However, should significant external financing be required, DBRS expects the Company to balance its growth with a prudent mix of debt and equity to remain consistent with its current rating category.

The Company also benefits from its joint venture (JV) partner, ConocoPhillips (rated “A”). Through joint ventures upstream at Christina Lake and Foster Creek, Cenovus is able to share capital expenditure requirements during its considerable growth phase. In addition, JV refinery operations provide integration in operations and much needed refining capacity for the Company’s considerable heavy oil production.

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

The applicable methodology is Rating Oil and Gas Companies, which can be found on our website under Methodologies.