DBRS Confirms Cenovus Ratings at A (low), R-1 (low), Trends Stable

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’ financial profile, integrated operations, and consistent operating performance, largely driven by its strong track record of oil sands development and production.

Cenovus’ integrated operations helped maintain the Company’s strong financial profile for six months ended June 30, 2012 (H1 2012). Debt-to-capital ratio remained below the long-term target range of 30% to 40% (27.3% as at H1 2012). Despite this, strong cash flow during H1 2012 was not sufficient to fund capex and dividends, as incremental debt and proceeds from asset sales were required to fund the shortfall.

Given that capex levels are expected to remain high for the foreseeable future ($3.0 billion to $3.5 billion per year expected beyond 2012) to fund growth, DBRS expects continued free cash flow deficits during this growth phase, with the Company gradually returning to its targeted debt-to-capital range. Pressure on the financial profile could become more substantial should the industry experience a sharp decline in crude pricing and/or unexpected project cost overruns. DBRS does note that Cenovus has taken a more prudent, phased approach to expansion plans, resulting in greater flexibility to cut back capex levels should pricing decline substantially. This phased approach allows the Company to complete a smaller phase, and pause future phases until pricing levels rebound.

As expansion plans within the oil sands continue, the Company’s exposure to heavy oil will increase over time. As a result, Cenovus will become more subjected to the highly volatile light-heavy oil price differential. However, due to its integrated refining operations, it is partially sheltered from the pricing volatility as refining operations act as a natural hedge. The Company typically benefits from lower purchase feedstock costs in periods of wide light-heavy crude price differentials, as well as WTI-Brent price differentials. This is expected to continue, providing refining operations maintain sufficient capacity to process Cenovus’ heavy oil production. Current capacity is approximately 452,000 barrels per day (226,000 net to Cenovus) with heavy oil refining capacity of 235,000 to 255,000 barrels per day (117,500 to 127,500 net to Cenovus).

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.