CA - Cenovus Energy: My Top Pick Among Canadian Majors

2024-04-10 11:20:53 ET

Summary

• Startup of the Canadian Trans Mountain Pipeline will ease previous transportation bottlenecks and likely provide a significant tailwind to local benchmark WCS pricing.
• While all Canadian majors should profit from this, I see Cenovus Energy as having the most leverage towards both WCS differentials and a generally favorable oil price outlook.
• I estimate CVE can hit its net debt target by Q3, allowing for 100% of FCF to be allocated towards shareholders for a potential ~7.3% total distribution yield (peers ~6.5%).
• Despite strong fundamentals, Canadian oils still trade at ~20% discount to US majors, with CVE's historical premium vs. peers having eroded recently.
• I see a favorable set-up for CVE as I estimate the market to gradually price in lower differentials and higher shareholder returns and initiate at Overweight (PT $34).

Driven by investor enthusiasm about the imminent opening of the Trans Mountain Pipeline, Canadian integrateds have outperformed their US peers and the broader energy industry YTD. I believe there is more gas in the tank as the combined outlooks for both oil prices in general and local crude benchmark WCS should provide a highly favorable environment for Canadian majors relative to previous years. I see Cenovus Energy ( CVE ) as offering the highest leverage to those drivers with the largest exposure to WCS spreads and upstream operations. With the company likely hitting its C$4B net debt target by Q3 latest and 100% of following FCF to be returned to shareholders, I initiate shares at Overweight with a price target of $34 per NYSE-listed share (~58% upside)....

For further details see: