Cenovus Sells Assets, Still A Bargain

In an expected move,

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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