Cenovus (NYSE:CVE) reported Q1 results before the bell Wednesday, beating earnings estimates, lifting the dividend, and adjusting net debt targets, while increasing cost and capex guidance. The business performed well overall, with the downstream segment driving the beat. Management’s newly introduced shareholder return framework appears conservative:
- Earnings – Cenovus (CVE) posted $0.81 in EPS for the quarter, versus Street expectations for $0.50; note that Q1 earnings benefitted from ~$0.13 of insurance proceeds related to the Superior refinery.
- Payout – management tripled the base dividend to $0.42 annually, a ~2.5% yield; the company also announced plans to pay out 50% of free cash flow through variable dividends and buybacks until net debt reaches $4.0b, at which point management plans to return 100% of excess free cash flow to shareholders.
- Guide – the capital budget for 2022 was increased by ~10% or $300m, with additional expenditures entirely related to the superior refinery; operating expenses were increased on higher AECO prices, though most of the increased expense is likely to be recaptured in higher upstream gas revenues.
- Refining – the downstream segment generated $544m in operating income during the quarter, up from $42m in Q4 and $184m in Q1 2021; interestingly, US refinery utilization came in at only 80%, suggesting the entire earnings uplift came from improved downstream margins.
- Shares – despite an existing share repurchase authorization, diluted shares outstanding rose by ~1.5% quarter on quarter.
Investors have spent much of the past year guessing at management’s plans for shareholder returns. Despite record free cash flow, shareholders have seen low-single-digit dividend payouts and a rising share count. Plans introduced Wednesday appear conservative; the $4.0b net debt target is less than 0.5x EBITDA in the current environment.
However, the business appears to be operating very well, cash flow has been exceptional and conservative shareholder return targets are better than no targets at all. Ahead of Q1 results, Canadian oil investors (CNQ) (SU) were focused on capital allocation strategies in the “high commodity price” scenario, and Cenovus (CVE) Management has clearly delivered in this regard.