Cenovus Energy (TSX:CVE)(NYSE:CVE) is an integrated oil and gas company. Cenovus adopted a flexible capital and operating strategy in 2020, which preserved liquidity during the COVID-19 pandemic. With the gradual recovery in oil prices towards the end of the year, Cenovus generated positive free funds flow in the fourth quarter, helping offset the impact of low oil prices on the company’s full-year results.
Year-over-year safety improvements
Most importantly, despite the challenges facing the oil and gas industry, Cenovus’s commitment to best-in-class safety performance appeared to remain the company’s top priority. Cenovus achieved year-over-year safety improvements at the company’s operations, recording a significant incident frequency of 0.01 compared with 0.14 the previous year and only has two process safety events compared with eight in 2019.
In 2020, Cenovus’s share price traded largely in line with the company’s peers while underperforming Canada’s composite and energy indexes, based on a total-shareholder return chart. The gradual recovery in Cenovus’s share price over the course of last year accelerated following the October 25th announcement of Cenovus’s plan to combine with Husky Energy and was in line with the overall recovery in benchmark crude oil prices in late 2020 and early 2021.
Deleveraging the balance sheet
From the date of the Husky announcement to the end of February, Cenovus’s share price increased 93% compared with 76% for a broader peer group of integrated producers, 86% for the company’s oil sands peer group, and 61% for Canada’s capped energy index. During the same period, benchmark West Texas intermediate (WTI) oil prices increased 54%, while Canada’s composite index increased by 11%.
On January 1 of fiscal 2021, Cenovus successfully closed the Husky transaction, creating a resilient integrated energy leader. The combination addressed three key strategic priorities for Cenovus, which included continuing to improve the company’s cost structure, enhancing the company’s market access, and deleveraging the balance sheet.
Strong portfolio of assets
In 2021, Cenovus expects to achieve nearly $1 billion of synergies, putting it firmly on track to reach at least $1.2 billion in annual run-rate synergies. Cenovus’s strong portfolio of well-matched upstream production and midstream and downstream assets creates a global competitor able to optimize margin capture across the heavy oil value chain, while largely mitigating exposure to light-heavy oil price differentials and maintaining a healthy exposure to global commodity prices.
Further, Cenovus’s enhanced financial strength sets the foundation for a business that will be resilient in virtually any commodity price scenario, with a robust and more stable free funds flow stream, allowing it to accelerate the deleveraging of the company’s balance sheet and return more value to shareholders. Following the completion of the Husky transaction, Moody’s Investors Service upgraded Cenovus to investment grade Baa3, while DBRS Limited upgraded it to BBB. Also, S&P Global Ratings confirmed Cenovus’s BBB- rating while Fitch Ratings maintained a BB+ rating.
Enhancing the investment-grade status
In addition, Cenovus has already delivered on the company’s commitment to reinstate a dividend after closing the Husky transaction. In 2021 and beyond, Cenovus appears set to remain focused on maintaining and enhancing the company’s investment-grade status.
