Cenovus downgraded over debt concerns in ConocoPhillips deal
DBRS Ltd. on Friday downgraded the credit rating of Calgary-based oil producer Cenovus Energy Inc., following a massive acquisition that has substantially increased the company’s debt profile.
The agency lowered Cenovus’s senior unsecured debt and issuer rating to BBB, down from BBB (high).
“The one-notch downgrades account for DBRS’s view that the acquisition has a negative impact on the credit metrics of Cenovus that more than offset the improvement in the company’s business risk profile,” the ratings agency said in a note Friday.
It also changed all trends to negative, reflecting concerns over the timing of its $17.7-billion acquisition of ConocoPhillips Co. announced earlier this year, and whether the company can sufficiently reduce its financial leverage.
“Today’s ratings revision is not unexpected,” Cenovus spokesperson Brett Harris said in a written note. “When we made our acquisition announcement in late March, DBRS indicated it was considering a potential revision.”
Cenovus shares have nosedived since the announcement of the ConocoPhillips deal, which included the acquisition of various oilsands assets and conventional oil and gas properties spread around Western Canada.
Cenovus stock was trading just over $9 on Friday, compared to its $16-$17 range in mid-March. Shares were up about one per cent in Friday afternoon trading.
On Tuesday the company saw a 10 per cent drop in its share price following an announcement that its chief executive Brian Ferguson would step down from the position effective October 2017. Ferguson had been CEO of the company since its inception in 2009.
The company, which is among the largest oilsands producers in Canada, now has debts totalling $12.7 billion, or four times earnings before interest, tax, depreciation and amortization (EBITDA), assuming WTI prices at US$54.
Company management announced on Tuesday that is now targeting divestments of between $4 billion and $5 billion by yearend. Those sales include its legacy oil asset Pelican Lake, about 300 kilometres north of Edmonton, and its Suffield natural gas development, in southeastern Alberta.
Harris wrote that the company has “had strong interest in the assets we’ve put up for sale.”
DBRS noted that the acquisition adds scale and size to the company’s asset base, and its increased stake in its flagship Christina Lake and Foster Creek oilsands developments “fortifies Cenovus’s long proven reserve life as well as improving operating and capital flexibility.”
If Cenovus receives proceeds “at or above” the midpoint of the $4 billion to $5 billion range, the agency said it would consider changing all trends to stable. It also warned that prolonged low oil prices may lead to “further negative rating action.”
The company has increased its oil hedges to protect against lower prices. The company has 143,000 barrels per day of production hedged for the remainder of 2017 at an average price of US$51.50, as well as another 50,000 bpd of crude hedged in the first half of 2018 at just under US$50.