Fitch Ratings – Chicago – 04 Jan 2021: Fitch Ratings has affirmed Cenovus Energy Inc.’s (CVE) Long-Term Issuer Default Rating (IDR) at ‘BB+’, and senior unsecured ratings at ‘BB+/RR4’, following the close of the Cenovus-Husky merger. The Rating Outlook remains Positive.
Source: Fitch Ratings
In addition, Fitch has assigned ‘BB+’/’RR4’ ratings to Husky Energy Inc.’s existing senior unsecured debt, including its senior unsecured notes and bonds, and its two unsecured revolvers (maturing in 2022 and 2024). With the close of the transaction, Husky has become a wholly-owned subsidiary of Cenovus and will remain so until the amalgamation is complete and Cenovus becomes the obligor of Husky’s long-term notes. The amalgamation process is consistent with Fitch’s previous expectations for pari passu treatment of Husky’s debt.
Cenovus’ Positive Rating Outlook reflects several of the transaction’s credit enhancing features, including the economic benefits of higher downstream integration, and the potential for up to CAD1.2 billion in run-rate synergies, which should boost CVE’s netbacks and FCF, as well as increase the company’s ability to organically lower its gross debt balances. The combined company will be the third largest upstream producer in Canada and the second largest Canadian-based refiner and upgrader.
CVE’s ratings are supported by its size and scale, integrated business model, relatively low sustaining capital, moderate decline rates associated with the oil sands, potential synergy gains associated with the merger, and its commitment to defending the balance sheet, including a track record of significant debt reductions prior to the coronavirus pandemic.
Rating concerns include lower realizations associated with oil sands, historically high volatility seen with Western Canadian Select (WCS) differentials and prices, CVE’s high initial post-merger leverage, and the impact of a second wave of coronavirus infections, which could slow the company’s ability to de-lever.
Fitch believes the company will not require asset sales to reach its de-levering targets under Fitch’s base case assumptions; however, the speed of de-levering will depend on underlying oil prices, the pace of recovery in refining margins and utilization, and the extent to which the company realizes stated synergies.