DBRS Comments as Cenovus Energy Inc. Acts to Sell Assets and Reduce Financial Leverage. More to Come…

On Monday, November 13, 2017, Cenovus Energy (Cenovus or the Company) announced an agreement to sell its majority interest in the Weyburn enhanced oil recovery project in Saskatchewan for $940 million. DBRS Limited (DBRS) notes that with this sale, Cenovus has sold or has agreements in place for the sale of a portfolio of legacy assets that were announced following the acquisition of Western Canadian assets from ConocoPhillips. The portfolio of asset packages (Pelican Lake, Suffield, Palliser and Weyburn) is expected to realize in total approximately $3.7 billion in gross cash proceeds. Cenovus has closed on the sale of Pelican Lake; the other three asset packages are to close by year end. The proceeds from these asset sales will be used to retire the $3.6 billion asset-sale bridge facility.

In aggregate, gross proceeds to be realized from the asset sales are in line with market expectations. DBRS notes that the expected reduction in the Company’s financial leverage (post the acquisition of Western Canadian assets from ConocoPhillips) is material. Nonetheless, DBRS notes that Cenovus has to take additional steps to further deleverage the balance sheet to support a BBB rating. Even accounting for the reduction in debt with the asset sale proceeds, the Company’s lease-adjusted debt-to-cash flow ratio remains well outside the BBB range. Previously, Cenovus had indicated a target of $4 billion to $5 billion in announced asset sale agreements by year end, and it has targeted to reduce net debt-to-EBITDA below 2.0 times by the end of 2019. Now that agreements have been reached for the sale of the legacy assets, Cenovus has commenced another round of dispositions. The Company has disclosed that it is in the process of marketing packages of non-core assets from the Deep Basin conventional oil and gas assets that were acquired as part of the ConocoPhillips transaction.

DBRS noted in its press release on June 23, 2017, (DBRS Downgrades Cenovus Energy Inc. to BBB, Changes Trend to Negative) that if Cenovus were able to realize proceeds from asset sales at or above the midpoint of the targeted range and if the Company could generate enough free cash flow to adequately reduce financial leverage, DBRS would consider changing all trends to Stable. Otherwise, if asset sales fall short and/or if oil prices weaken materially for an extended period, DBRS may be compelled to take a further negative rating action. At this time, DBRS maintains the Company’s Issuer Rating and the rating of the Senior Unsecured Debt at BBB. All trends remain as Negative.

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

The principal methodology is Rating Companies in the Oil and Gas and Oilfield Services Industries (August 2017), which can be found on dbrs.com under Methodologies.

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