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Related Issuers
Rating Action:

Moody's reviews Cenovus Energy's ratings for upgrade

26 Oct 2020

Toronto, October 26, 2020 -- Moody's Investors Service (Moody's) placed the ratings of Cenovus Energy Inc. (Cenovus) on review for upgrade, including its Ba2 Corporate Family Rating, Ba2 senior unsecured notes rating and Not Prime commercial paper rating.

The review of Cenovus' ratings follows the announcement[1] that Cenovus and Husky Energy Inc. (Husky) have reached an agreement to merge in an all-stock transaction valued at C$23.6 billion, inclusive of debt. The combined company will operate as Cenovus and remain headquartered in Calgary, Alberta. The transaction has been unanimously approved by the Boards of Directors of both Cenovus and Husky. The transaction is expected to close in Q1 2021, subject to the timing of customary closing conditions, regulatory approvals, and the approval of shareholders of both Cenovus and Husky.

On Review for Upgrade:

..Issuer: Cenovus Energy Inc.

.... Corporate Family Rating, Placed on Review for Upgrade, currently Ba2

.... Probability of Default Rating, Placed on Review for Upgrade, currently Ba2-PD

....Senior Unsecured Shelf, Placed on Review for Upgrade, currently (P)Ba2

....Senior Unsecured Commercial Paper, Placed on Review for Upgrade, currently NP

....Senior Unsecured Regular Bond/Debenture, Placed on Review for Upgrade, currently Ba2 (LGD4)

Outlook Actions:

..Issuer: Cenovus Energy Inc.

....Outlook, Changed To Rating Under Review From Negative

RATINGS RATIONALE / FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The review will focus on the likelihood of closing, the final terms of the merger and our forward view of the merged company's business and financial risks, including how downstream integration mitigates Canadian heavy oil differentials, the ability to generate free cash flow and de-lever, the dividend policy, and management's longer term targets for financial metrics. Our current assumptions, which are subject to confirmation, include:

• All of Cenovus' and Husky's senior unsecured notes will be pari passu

• Financial policies are expected to be conservative, given that the management teams and boards of Cenovus and Husky both have conservative financial policies, demonstrated by the rapid reduction of dividends and capex during oil price shocks

• The combined asset base will have an investment grade profile with significant downstream integration - a sizable, long-lived, low decline, and low cost production and reserve base -- stable and significant cash flow from the well-priced contracts for offshore China natural gas production

• The merged company will have the ability to generate significant free cash flow at low oil prices with the proceeds largely used to reduce debt, improving the weak 2021 leverage metrics

Should the merger close on the conditions and structure we currently expect, and our forward view of its business and financial risk remains unchanged from today, it is likely that the merged company's senior unsecured debt would be assigned a Baa3 rating. The rating outlook would likely be negative, reflecting the uncertainty around the successful integration of the combined assets, and the pace of deleveraging and commodity price improvement.

Cenovus is a Calgary, Alberta-based exploration and production company with interests in downstream refinery assets. Cenovus had approximately 3.8 billion barrels of oil equivalent of net proved reserves, and produced about 465 thousand boe/d (gross) in Q2 2020.

The principal methodology used in these ratings was Independent Exploration and Production Industry published in May 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1056808. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

REFERENCES/CITATIONS

[1] https://www.cenovus.com/news/news-releases/2020/10-25-2020-cenovus-and-husky-combine-to-create-a-resilient-integrated-energy-leader.html 25-Oct-2020

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Paresh Chari
Vice President - Senior Analyst
Corporate Finance Group
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Donald S. Carter, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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​
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