Cenovus Stock: Buyback of a Third of Market Cap by 2026 (NYSE:CVE)

We initiated our coverage of Canadian oil major Cenovus Energy (NYSE:CVE) in April when we outlined our favorable view of the company given 1) a deep and sustainable portfolio benefiting from tightening WTI/WCS spreads and 2) the company being on track to distribute 100% of FCF to shareholders, leading us to name it our top pick among Canadian oils. While the stock has (slightly) underperformed North American broads and (significantly) underperformed Canada’s Suncor and Imperial, we continue to see a favorable setup as management has hit its net debt target in Q2, and CVE’s valuation discount increased further.

On track to distribute 100% of FCF starting this Q, we reiterate our Overweight rating on Cenovus and view it as a potential outperformer among North American oils. We are marginally increasing our price based on SOTP target of $34 to $35 per US ADR, implying a current upside of ~78%. Key risks remain in broader energy market downturns, as well as additional regulatory hurdles for Canadian oil and gas producers.

(Note: Canadian peers are Suncor (SU) and Imperial (IMO). US companies are Exxon (XOM) and Chevron (CVX). All financials in C$ unless otherwise noted, price targets refer to stocks listed in US.)

Key Discussion Points

With net debt target achieved, 100% of FCF is now distributed for an annual return of 13-15% through 2026. Cenovus reached its target of $4 billion in net debt in Q2, implying a 100% FCF payout ratio as of Q3. While buybacks (and variable divs) returned 1% and 6% in Q1 and Q2 respectively, we expect this to increase to ~11% by Q2 as we see ~1B USD in redemptions/quarter. For the full fiscal year, we calculate that this implies a cash yield of ~8.3% from dividends and buybacks.

While this year, however, was marred by a lower Q1 return that only saw ~60% of FCF distributed to shareholders, we see significant expansion starting next year. Assuming consensus FCF numbers and a 100% distribution ratio with ~5% annual dividend/share growth, we estimate 2025 and 2026 distribution yields to grow to ~14.4% and ~14.9% respectively %. Most of this will be driven by share buybacks, with Cenovus buying back ~12% of outstanding shares per year, allowing the company to retire about 40% of outstanding shares by 2026, according to our calculations.

This would reduce the number of shares to ~800 million, a figure last seen around 2016, and eliminate the dilutive impact on EPS and FCF/sh that we saw following the oil price crash of the mid-2010s and of Covid.

Compared to its key partners, Suncor and Imperial Oil, Cenovus shareholders are showing potential screens just as far ahead, with CVE’s 11.4% annualized distribution expected for Q3 and Q4, compared to Suncor’s ~9% and Imperial at ~7%. In 2025 and 2026, Suncor expects to hit its net debt target by Q1/2 25 and at consensus FCF estimates, we see CVE’s cash yield ~5pp higher and significantly above Imperial.

Also, comparing annualized returns to US majors Exxon and Chevron, Cenovus’ distribution potential continues to outperform peers by a wide margin. While North American oil majors pay about 9% of their market cap on average through 25E and 26E, Cenovus’ yield is nearly 50% above that based on both a highly adjusted payout policy and an equity valuation relatively reduced. Given that the oil industry is largely defined by its ability to return capital to shareholders, we continue to see CVEs as a long key in the sector.

FCF yield of >12% implies an attractive valuation/distribution framework relative to Canadian and US peers. According to 25E FCF consensus estimates, Cenovus stock is currently trading at a yield of ~12.5%, implying a significant discount to the broader major NA average of ~9%, while on the other hand, distributions of ~16.5% are almost 80% above the ~9% group average. The risk/reward has also improved considerably compared to its key Canadian peers in light of recent underperformance in the share price. At an FCF yield of 12.5%, CVE now looks ~20% cheaper than Suncor and Imperial, while shareholder returns are at roughly double the rate.