Cenovus Energy Inc. Downgraded To 'BBB-' From 'BBB' On Weakened Projected Debt Measures; Outlook Negative

  • S&P Global Ratings lowered its West Texas Intermediate (WTI) and Brent crude oil price assumptions on March 19, 2020, which initiated a global review of its rated oil and gas issuers.
  • Following the publication of our reduced price assumptions, our projected cash flow and leverage metrics for Cenovus Energy Inc. have deteriorated from our previous estimates published in December 2019.
  • S&P Global Ratings lowered its long-term issuer credit and senior unsecured debt ratings on Cenovus Energy Inc. to 'BBB-' from 'BBB', as the rating service's projected three-year (2020-2022) weighted-average funds from operations (FFO)-to-debt ratio has weakened to the bottom of the 20%-30% range. The outlook is negative.
  • The negative outlook reflects the significant deterioration of our projected annual and 2020-2022 three-year, weighted-average FFO-to-debt ratios, with our projected three-year, weighted-average FFO-to-debt ratio in the 20%-23% range. If crude oil prices do not conform to our expectations, we believe the company's weighted-average FFO-to-debt ratio could fall below 20%.
TORONTO (S&P Global Ratings) March 26, 2020--S&P Global Ratings today took the rating actions listed above. Under our revised hydrocarbon price assumptions (published March 19, 2020), we are now projecting materially lower revenues and FFO for Calgary, Alta.-based Cenovus. By virtue of the company's heavy oil-focused product mix, with bitumen accounting for about 80% of our estimated 2020 production for Cenovus, our cash flow forecasts are hampered by our reduced WTI price assumptions in all forecast years, compounded by the discounted Western Canadian Select (WCS) price realized for bitumen crude oil. The weaker assumed prices in our 2020-2022 forecast period have reversed the cash flow and leverage metrics improvement the company achieved through 2019. As a result, we are now projecting Cenovus' three-year, weighted-average FFO-to-debt ratio just marginally above 20%, compared with our previous estimate of 30%-33%.
Despite the company's very low steam-assisted gravity drainage (SAGD) production costs, which were below C$10 per barrel in 2019, the manufacturing-like characteristics of bitumen production, and the need to achieve and sustain certain steaming levels to produce bitumen, in-situ bitumen production cannot be suspended and restarted with the same agility as conventional or shale oil production. As a result, exploration and production (E&P) companies operating SAGD assets are unlikely to materially reduce production levels during periods of low crude oil prices. Although our crude oil price assumptions and projected annual FFO are increasing beyond 2020, there is virtually no cushion relative to our 20% FFO-to-debt downgrade trigger. Unanticipated operational issues or realized prices below our current assumptions could weaken cash flow metrics below the minimum threshold required to support the 'BBB-' rating.
The negative outlook reflects the significant deterioration of our projected annual and 2020-2022 three-year, weighted-average FFO-to-debt ratios, with the latter just above 20%. Despite the company's adherence to moderate financial policies, and the counterbalancing margin uplift provided by Cenovus' downstream joint venture, the company's cash flows remain vulnerable to volatility in crude oil prices and heavy oil differentials, as bitumen production accounts for about 80% of Cenovus' upstream product mix.
In an environment of persistently weak crude oil prices, we could lower the rating to 'BB+' if our estimate of the company's three-year, weighted-average FFO-to-debt ratio fell below 20%, and was not expected to improve during our 24-month outlook period. We could also lower the rating if Cenovus' profitability weakened relative to that of its global E&P peers, which could change our assessment of its business risk profile.
With the company's capital spending expected to remain near maintenance levels throughout our 24-month rating outlook period, due to the significant reduction in discretionary spending, we believe cash flow metrics could only improve in tandem with rising crude oil prices. We would revise our outlook to stable if Cenovus was able to strengthen and sustain its three-year, weighted-average FFO-to-debt ratio at the upper end of the 20%-30% range, while continuing to generate positive discretionary cash flow.
We work across the world

From London to San Francisco, to our home base in (Saint Helier) Jersey, we’re looking for extraordinary and creative scientists to help us drive the field forward.

AC Investment Inc. currently does not act as an equities executing broker or route orders containing equities securities. If AC Invest’s business model were to change and it begins routing non-directed orders in NMS securities, it will comply with the disclosure requirement of Rule 606.

77 Massachusetts Avenue Cambridge, MA 02139 617-253-1000 pr@ademcetinkaya.com