S&P Raises Outlook on Cenovus Energy (CVE) to Stable; Sees Sale Proceeds Funding Cash Flow Shortfall

Standard & Poor's Ratings Services said it revised its outlook on Cenovus Energy (NYSE: CVE) to stable from negative. At the same time, Standard & Poor's affirmed its ratings on Cenovus, including its 'BBB+' long-term corporate credit rating on the company.

"The outlook revision reflects our view that Cenovus' expected forecasted cash flow shortfall for the next 24 months would be funded by proceeds from the asset sale," said Standard & Poor's credit analyst Aniki Saha-Yannopoulos. "At the same time, the transaction has materially improved net-debt cash flow leverage metrics," Ms. Saha-Yannopoulos added.

Today, Cenovus announced that it is selling its 4.8 million gross acres of royalty interest and mineral fee title lands in Alberta to Ontario Teachers' Pension Plan for gross C$3.3 billion. We do not believe the sale would materially affect the company's production or capital budget; thus we expect EBITDA and free cash flow generation to be almost unchanged from previous estimates. The infusion of cash to the company's balance sheet significantly lowers Cenovus' 2015 net debt-to-EBITDA compared with our previous forecast. Similarly, FFO-to-net debt also shows a significant increase compared with our previous estimate. We expect Cenovus to maintain or improve these credit measures in the next 24 months under our pricing assumptions.

The "strong" business risk profile and "significant" financial risk profile indicate an anchor score of 'bbb'. We have applied a positive comparable ratings analysis adjustment because we believe the organic growth prospects inherent in the in-situ bitumen resource base, which provides multidecade reserves and production growth (with significantly less geological risk than conventional oil and gas reserves) support a credit profile better than 'BBB' rated E&P peers and commensurate with a 'BBB+' rating.

The stable outlook reflects Standard & Poor's opinion that Cenovus' will maintain strong liquidity and 2015-2016 FFO-to-net debt would remain above 30% during this period of protracted low hydrocarbon prices. We assume that Cenovus will continue to maintain its competitive operating efficiency during this period to maintain its current business risk profile.

If weakening operating efficiency causes EBITDA and FFO to fall below the levels we are forecasting, such that our five-year, weighted-average fully adjusted FFO-to-debt trends into the 30%-35% range and debt-to-EBITDA increases above 3.0x, we could take a negative action on Cenovus because the company's financial risk profile would no longer be commensurate with our expectations for the 'BBB+' rating. This could be due to deteriorating cash flow or any material transaction that could pressure the company's credit metrics.

We believe there is little near-to-medium term potential for an upgrade to 'A-' because we do not expect the company's cash flow protection metrics, specifically its debt-to-EBITDA and FFO-to- debt, will improve to the levels required to support the higher rating. In our opinion, Cenovus would need to strengthen its fully adjusted, five-year weighted-average FFO to debt above 60%, and improve its forecasted weighted-average debt-to-EBITDA below 1.5x, in line with a modest financial risk profile category, to support an 'A-' rating.

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