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Stock Analyst Update

Cenovus Sells Assets, Still A Bargain

We think this is a good move for Cenovus because we don’t ascribe much value to its non-oil sands exploration and development assets.

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In an expected move,  Cenovus Energy (CVE) entered into an agreement to sell its Pipestone and Wembley natural gas and liquids business in northern Alberta to aid in the deleveraging of its balance sheet. Cenovus will receive CAD 625 million in cash proceeds, which approximates CAD 71,000 per flowing barrel. Management expects the deal to close during the third quarter of 2018. The business produced an average of 8,800 barrels of oil equivalent per day year-to-date with 55% of the production coming from natural gas.

We think this is a good move for Cenovus because we don’t ascribe much value to its non-oil sands exploration and development assets. Most importantly, we think this will aid in the company in achieving its deleveraging goal of less than 2 times net debt/EBITDA by the end of 2019. We fully expect Cenovus to meet its goal. At that point, we expect the company to begin its industry leading, solvent-assisted technology growth projects.

We are maintaining our $16 (CAD 21) fair value estimate and no-moat rating, and we still see tremendous upside in the stock. We believe the market is too narrowly focused on the company's temporary increase in short-term leverage and is overlooking the immense growth potential in its oil sands reserves that can be brought on line with solvent-aided process technology. Despite the upside in the stock, we still caution investors that the stock could retreat in the medium term if oil prices fall to our midcycle estimate of $55/bbl or if the heavy oil discount remains high. We remind investors, though, that these assumptions are already priced into our model. We expect lower price realizations over the next few quarters, coupled with high levels of leverage. However, we expect the heavy oil discount to narrow over the long-run as producers take advantage of rail options in 2019 and pipeline expansion projects are placed into service and Cenovus to see an uptick in cash flow.

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Joe Gemino does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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