Shares of Cenovus Energy (CVE.TO)(CVE) have been downgraded by Scotiabank Global Equity Research as a weaker US refining margins challenge plans to slash debt and boost shareholder returns in 2023.
The Calgary-based company cut its net debt by more than half last year, to $4.3 billion, with the aim of bringing that figure below $4 billion this year. Hitting that target will trigger a hike in the company’s returns to shareholders to 100 per cent of excess free cash flow, up from 50 per cent today.
Scotiabank analyst Jason Bouvier notes Cenovus’ downstream assets, largely located in the US, have lower margins than its Canadian peers. The company’s Toledo and Superior refineries have dragged on performance. The Superior Refinery, acquired by Cenovus in its merger with Husky Energy, has been offline since the 2018 explosion and fire. The Toledo Refinery is undergoing repairs after a deadly fire in September.
“Margins at these refineries will be weaker than usual as they are restarted and optimized,” Bouvier wrote in a note to clients on Friday. “The restart of the Superior and Toledo refineries is having a greater impact on Cenovus’ US downstream cash flows than expected.”
At the same time, he saw Cenovus, and other Canadian large cap oil and gas companies, reporting higher debt in the first quarter of 2023 due to tax installations, and spending related to volatile commodity prices and closing costs for acquisitions.
Bouvier estimates Cenovus will take until late in the third quarter of this year to bring its debt below $4 billion.
“Ultimately, this will slow the pace of shareholder returns,” he wrote. “However, we continue to expect an increase to the base dividend (could be sizeable) this spring.”
Bouvier cut his rating on Cenovus stock to “sector perform” from “sector outperform,” while maintaining a $28 price target on Toronto-listed shares.
The stock fell 1.64 per cent to $23.44 per share at 11:09 am ET on Friday, adding to a roughly nine per cent decline year-to-date.
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.
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