Cenovus Energy Shares Crawl Out Of The Doghouse
Cenovus Energy (CVE) reported underwhelming—yet in-line—second-quarter results. After the company badly missed expectations in the previous two quarters, the market discounted another disappointment in CVE’s share price. When results met expectations and pointed to better results to come, investors bid the shares higher. CVE closed up 2.2% on a day when most E&Ps traded lower.
Year-to-date, CVE has lagged behind oil prices and its large-cap oilsands peers Suncor Energy (SU) and Canadian Natural Resources (CNQ). Today’s relative outperformance narrowed the gap between CVE and its peers, signaling that the shares are finally out of the proverbial doghouse.
Operating Performance Set to Improve in the Second Half
The biggest takeaway from today’s report was that management is executing according to its guidance earlier in the year. Since 2022, CVE’s downstream performance has consistently disappointed expectations, and management assured shareholders that the segment would be performing at its long-term potential by the second half of the year.
While downstream results continued to suffer in the second quarter—the refining operating margin was a weaker-than-expected $143 million—management reported that the segment’s operational issues are nearly resolved. The stage is now set for a strong performance in the second half of this year and beyond.
CVE’s Toledo and Superior refineries have been in the process of restarting after fires shut them down, creating a headwind to the company’s downstream performance. Management reported that the Toledo refinery was fully-operational by mid-June and that the Superior refinery is in the final stages before startup. Among CVE’s other refineries, the Wood River refinery completed maintenance and the Borger refinery is back to full utilization after planned and unplanned outages in the second quarter.
Downstream throughput during the quarter was 442,500, an impressive 23% above first-quarter levels. Management reported that CVE’s downstream assets are operating at utilization rates in the low 90% range.
We expect CVE’s downstream segment operating margin to increase above $500 million in the third quarter if crack spreads remain at healthy levels. The segment will get an additional operational boost in the fourth quarter from a full-quarter contribution from the Superior refinery.
CVE’s upstream operations performed largely in line with expectations. The operations were disrupted by wildfires, which caused approximately 85,000 Boe/d of natural gas and NGL production to be shut-in during May and part of June. Management had disclosed the production outages back in May, so they came as no surprise to the market.
The annualized impact from the wildfires will be approximately 10,000 Boe/d. Combined with an additional loss of 5,000 Boe/d from the slow startup of the Lloydminster thermal project earlier in the year, production guidance was revised lower to the range of 775,000 to 795,000 Boe/d, roughly in line with 2022 levels. Guidance was lowered approximately 2% from the original 790,000 to 810,000 Boe/d.
Another significant upstream development was CVE’s progress on the construction of the West White Rose project and Tera Nova asset life extension. These offshore developments offer attractive returns once their ongoing heavy investment phase is complete.