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

DBRS has today confirmed the Issuer Rating of Cenovus Energy Inc. (Cenovus or the Company) at A (low), along with the rating of its Commercial Paper at R-1 (low) and its Senior Unsecured Debt at A (low), all with Stable trends. The rating confirmations reflect Cenovus’s (1) integrated operations, (2) strong joint venture partners and (3) consistent operating performance, largely driven by its strong track record of oil sands development and production.

Cenovus’s financial profile weakened in 2012, largely driven by its high growth capital spending toward its oil sands business, resulting in a pressured balance sheet. Despite increased operating cash flow, the increased capex program resulted in a cash flow deficit of $584 million. Leverage increased to approximately 32% (adjusted debt, including operating leases at 35%), which is at the lower end of the Company’s targeted 30% to 40% range. DBRS would consider leverage above 40% to be aggressive for the current rating category, and could result in negative rating action.

Going forward, Cenovus will achieve growth through continued expansion and development of its oil sands operations. With approximately 55% of the Company’s forecasted 2013 capex of $3.2 billion to $3.6 billion targeted at oil sands development, Cenovus is increasing its exposure to heavy oil, which is subject to the volatile light/heavy oil differential. This risk is exacerbated by its concentration in western Canada (100% of production), which has recently experienced high volatility in crude oil prices, particularly in heavy oil. This could lead to significant volatility in upstream cash flow.

However, Cenovus’s downstream operations (46% of pre-tax earnings) act as a partial natural hedge against pricing volatility in upstream operations and should provide stability to cash flow. Downstream operations typically benefit from lower purchased feedstock costs in periods of wide light-heavy crude price differentials. This natural hedge is expected to continue, provided refining operations maintain sufficient capacity to process Cenovus’s heavy oil production. However, as oil sands production growth continues, the Company’s production could become more exposed to volatile heavy oil prices if upstream volumes surpass the Company’s refining capacity.

Despite this, the Company remains one of the lowest-cost producers in the oil sands, leaving it better placed to withstand a weaker pricing environment. In addition, DBRS notes that Cenovus has taken a more prudent, phased approach to expansion plans, resulting in greater flexibility to cut capex if necessary.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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