DBRS Limited (DBRS Morningstar) has announced that it:
upgraded Cenovus Energy Inc.’s (Cenovus or the Company) Issuer Rating and Senior Unsecured Debt rating to BBB (high) from BBB and the Company’s Preferred Shares rating to Pfd-3 (high) from Pfd-3. All trends are Stable. The upgrades follow the significant reduction in gross debt ($4.3 billion in 2022), which has improved the Company’s credit metrics and financial risk profile. The Stable trends reflect DBRS Morningstar’s expectation that the reduction in gross debt will allow the Company to maintain its lease-adjusted debt-to-cash flow ratio at around 1.50 times (x) under DBRS Morningstar’s base-case commodity price assumptions (see “DBRS Morningstar Updates Oil and Natural Gas Price Forecasts: Midcycle Pricing Band Widened and Oil Price Forecast Raised” dated September 26, 2022).
Stronger commodity prices, noncore asset sales, and a focus on reducing debt have allowed Cenovus to deleverage materially and well ahead of DBRS Morningstar’s expectation at the close of the acquisition of Husky Energy Inc (Husky Acquisition). Cenovus continues to prioritize deleveraging and expects to direct approximately 50% of the expected excess free funds flow (cash flow less capex, base dividends on common and preferred shares, decommissioning liabilities, and principal repayment of leases, plus proceeds from asset divestitures) surplus toward the balance sheet until it achieves its revised net debt (debt excluding operating leases and netting out of cash) target of $4.0 billion (Q3 2022: $5.28 billion). Based on its base-case commodity price assumptions, DBRS Morningstar expects Cenovus to reach its net debt target in Q1 2023. The rating upgrade is driven by DBRS Morningstar’s assessment that the reduction in gross debt in 2022 and achievement of its net debt target should allow the Company to maintain its financial risk profile commensurate with the rating through commodity price cycles. DBRS Morningstar also believes that the improvement in balance sheet strength provides the Company the flexibility to address challenges and costs associated with meeting voluntary and regulatory mandated greenhouse gas (GHG) emission reduction targets.
Cenovus’ business risk profile is strong and is underpinned by its (1) significant size (production of 777.9 thousand barrels of oil equivalent per day (Mboe/d) and upgrader/refinery throughput of 533.5 thousand barrels (bbl) per day in Q3 2022); (2) integrated upstream and downstream operations; and (3) long-life, low-cost oil sands assets at Foster Creek and Christina Lake and contracted production in Asia-Pacific. DBRS Morningstar expects the Company to maintain its business risk profile with a modest increase in near-term production driven by the Sunrise acquisition and optimization/debottlenecking projects at the Company’s oil sands assets and medium term growth through further optimization of oil sands assets and the West White Rose (WWR) project. Cenovus’ downstream integration is also expected to improve with the acquisition of the remaining stake in the Toledo refinery (expected to close in 2023), startup of the Superior refinery in Q1 2023, and capital investments aimed at optimizing and reducing operating costs at its downstream operations. The Company’s business risk profile remains constrained by its exposure to lower margin heavy and thermal oil and high concentration of oil-producing assets in Western Canada.
Cenovus expects production in 2023 to average between 800 Mboe/d and 840 Mboe/d with a budgeted capex of $4.0 billion to $4.5 billion. While capex in 2023 is higher relative to 2022 because of cost inflation and committed capital spend on the WWR project, it also includes a growth/discretionary component of $0.5 billion to $1 billion (excluding the WWR project), which could be scaled back if required. DBRS Morningstar expects the Company to generate a material free cash flow (cash flow after capex and dividends) surplus in 2023 and 2024 despite DBRS Morningstar’s expectation that the WTI price of crude oil will decline to the middle of DBRS Morningstar’s midcycle pricing band of USD 50 to USD 70 per barrel (/bbl) over the period. DBRS Morningstar expects the Company’s liquidity position to remain strong with its committed credit facilities totalling $5.5 billion remaining largely unused.
A further upgrade would require the Company to reduce gross debt and improve its lease-adjusted debt-to-cash flow ratio to consistently around 1.00x. Conversely, should oil prices weaken materially (below USD $45/bbl) and credit metrics stay weak for an extended period, DBRS Morningstar may take a negative rating action.
Affected issues are CVE.PR.A, CVE.PR.B, CVE.PR.C, CVE.PR.E and CVE.PR.G.
Thanks to Assiduous Reader CanSiamCyp for bringing this to my attention!
Hi,
With the current yield on preferred shares, I am thinking of buying some for my TFSA. I understand that it is most advantageous in a margin account but wanted to hear everyone’s thoughts on this,
Regards,
Ferris
With the current yield on preferred shares, I am thinking of buying some for my TFSA. I understand that it is most advantageous in a margin account but wanted to hear everyone’s thoughts on this.
In a TFSA or other registered account, you will not be taxed on your income, which is, of course, a Good Thing.
However, a great deal of the allure of preferred shares is that they pay dividends, which are tax advantaged: it takes about $1.30 of interest income to give you the same after tax amount as $1.00 in dividends (the precise level varies by province and income level; see posts filed under “Taxation”). If you keep your preferreds in a TSFA (or other registered account) you are throwing away that advantage.
It is best from a taxation point of view in a balanced portfolio, to keep your interest-bearing investments in a TSFA or other registered plan, and keeping investments with a tax advantage (dividends and maybe capital gains) in your other (taxable) accounts.
Thanks for the feedback.
“It is best from a taxation point of view in a balanced portfolio, to keep your interest-bearing investments in a TSFA or other registered plan, and keeping investments with a tax advantage (dividends and maybe capital gains) in your other (taxable) accounts.”
Right. Nonetheless, there are many discount fixed resets (particularly with 2025+ reset dates) that are trading at dramatically low prices and represent a decent investment in ANY account. Low being relative to other series of the same issuer (as can be exposed by Implied Volatility Theory, as long time readers here really ought to know) and low on an absolute basis relative to other investment opportunities.
An example of the latter is INE.PR.A, resetting in 2026 at GOC5 +279. At today’s pricing (3.05% for the 5 year and $13.14 for the issue) and a spread of +300, the capital gain would be 83.7% (don’t think we will see 300 ever again, then pick something else). In the meantime, the current yield is 6.2% and the reset yield (based on today) is a whopping 11.1%. Almost anyway we slice this thing it is a good buy. Many other issues present similar opportunities (albeit for the quality of this issuer, this is one of the best I can see right now).
Thanks stusclues.
I was on the same train of thought. I was going to move the TFSA money into OAKEN Financial for a 5.25% GIC but starting thinking I can do better with many of the Preferreds.
Thank you to you both for your comments.
Happy Holidays and a Happy New Year to everyone,
Ferris
> Nonetheless, there are many discount fixed resets (particularly with 2025+ reset dates) that are trading at dramatically low prices and represent a decent investment in ANY account
Echoing this statement — don’t let the (tax-treatment) tail wag the (portfolio) dog.
> I was going to move the TFSA money into OAKEN Financial for a 5.25% GIC but starting thinking I can do better with many of the Preferreds
Be careful with your thinking here — is this better on a risk-adjusted-basis? Is 200bps enough comphensation for the extra risk? Probably not IMO. but an extra 500bps, possibly.
Sure rates have gone up, shouldn’t rate-resets raise in price to reflect the higher reset yields? Possibly, but perhaps we require a greater spread to make up for the greater credit-risk we’re now taking on due to higher default risk.
On the topic of risk and income (as supposed to eligible-dividends); is anyone watching any mortgage corps?
Be careful with your thinking here — is this better on a risk-adjusted-basis? Is 200bps enough comphensation for the extra risk?
And take care to define what you mean by risk.
fsabbagh, my situation is similar to yours and I will offer my experience and thoughts.
I have an Oaken TFSA (since 2018) and in 2021 I did not like the GIC rates being offered so I opened a TFSA with CIBC Investors Edge. My contribution room was over $8,000 and I bought 360 shares of ECN.PR.C. By the end of 2021 I thought I was a genius, as the market price had gone up. So I did the same thing in 2022 with TRP.PR.A. Now I am not sure if I am smart or not, but I will do the same in 2023 and deposit my full contribution room to my CIBCIE TFSA and buy more preferred shares.
At the start of 2022 I was not happy with any of the GIC rates that Oaken was offering so I took out of my Oaken TFSA the principal of the maturing GIC. Maybe this is not the place to discuss Oaken, but it is a problem with Oaken’s TFSA in that they do not allow a savings account inside the TFSA. A savings account would allow one to wait until one was ready to take the offered rates.
Oaken is offering 5.25% for one year. What are you going to do on maturity? Your choices with Oaken are buy another GIC or remove the money. I like my CIBCIE TFSA because I have more flexibility. I can hold cash or buy stocks or GICS. With my stocks, if I need the cash I can sell and withdraw the cash. Oaken and its GICS you are strictly ruled by their schedule and offerings.
For full disclosure, in 2023 I like the Oaken rates now and I will rollover a maturing GIC into another GIC. However, my 2023 contribution room is going to CIBCIE.
“So I did the same thing in 2022 with TRP.PR.A.”
Why not consider a swap to TRP.PR.B or .C? At current prices, they have a bit more upside.
Stusclues, thank you for the advice.
At the risk of revealing one of my character flaws, I am not considering your advice, because of my lethargy. I am not able to evaluate the differences in “upside” between different TRP issues myself. I only own 510 shares of TRP.PR.A in my TFSA. If the market price for the TRP issues ever recover, I hope TRP.PR.A goes up with the rest. In the meantime, I continue to collect the higher current income.
“I am not considering your advice, because of my lethargy.”
Wonderfully honest answer 🙂
I suggest that you might be less lethargic than you think. A very large number of smart people I know don’t seem to know how to begin to even consider preferred shares for their portfolios. Maybe 2023 is the year you dig into Implied Volatility Theory?