DBRS Updates Report on Cenovus Energy Inc.

DBRS has today updated the report on Cenovus Energy Inc. (Cenovus or the Company). The credit quality of the Company is based on its (1) integrated operations, (2) strong joint-venture partnerships with ConocoPhillips and Phillips 66 and (3) efficient deployment of capital as well as operational efficiency. Despite these strengths, the Company’s rating is limited by (1) potential balance sheet pressure from high growth capital spending, (2) increasing exposure to heavy oil and (3) concentration of operations in North America.

In Q1 2012, the Company’s financial profile remained consistent with 2011 levels. Cenovus has remained below its target debt-to-capital range of 30% to 40% (27.8% as of March 31, 2012) and debt-to-EBITDA range of 1.0 times (x) to 2.0x (0.98x for the last twelve months ending March 31, 2012), largely driven by continued strong oil price realizations, further liquids production growth and higher refining margins.

The Company is expected to gradually return to its targeted debt-to-capital range through cash flow deficits resulting from significantly increased capital spending (capex) during its aggressive growth phase. For 2012, DBRS does not expect cash flow to be sufficient to fund dividends (estimated at $660 million) and capex ($3.1 billion to $3.4 billion), based on results to date. Credit metrics may face some short-term negative pressure, although this should be manageable as the Company maintains adequate liquidity through its credit facility, issuance of commercial paper ($270 million outstanding at Q1 2012) and cash balances.

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 prudent, less reliance will be placed on cash flow from declining gas production, as Cenovus strategically manages natural gas production. Incremental cash flows from oil sands production should begin to fund expansion in the near future. 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.

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

The applicable methodology is Rating Oil and Gas Companies (April 2011), which can be found on our website under Methodologies.