DBRS Comments on Cenovus Energy re: ConocoPhillips JV Spinoff

DBRS notes today that Cenovus Energy Inc.’s (Cenovus or the Company) joint-venture partner, ConocoPhillips (COP), has announced that its board has approved a proposal to separate COP’s refining and marketing (R&M) and exploration and production (E&P) businesses into two pure-play, stand-alone, highly focused, publicly traded corporations via a tax-free spinoff of the R&M business (the Transaction). The Transaction is expected to close in the first half of 2012, subject to regulatory and other approvals (see the separate press release dated today in which COP’s “A” rating is placed Under Review with Developing Implications). DBRS believes the Transaction should not have any material rating impact on Cenovus. The joint-venture arrangements with COP (JV) include Foster Creek and Christina Lake in-situ oil sands operations, currently in production, and two refineries (Wood River, Illinois, and Borger, Texas) in the United States. Cenovus is currently rated A (low) and R-1 (low), both with Stable trends.

The Transaction is expected to result in two new, highly focused companies, with sufficient size and scope and free cash flow generating abilities to support future growth opportunities, including the JV. DBRS does not currently anticipate that the proposed Transaction will result in rating downgrades for COP if the Transaction proceeds as expected. However, DBRS expects that Cenovus could be dealing with a R&M JV partner in the future that could potentially have a lower rating than COP’s current “A” rating status on the downstream side. DBRS notes that JV’s core downstream project to upgrade the two refineries mentioned above is more than 95% complete, with most capex spent (Cenovus’s share of the estimated cost is $1.95 billion), with scheduled completion in late 2011. DBRS will continue to monitor developments, primarily COP’s satisfactory final capital structures with the appropriate allocation of assets and debt to maintain financial profiles consistent with the current credit ratings.

Cenovus continues to operate satisfactorily, with production of approximately 220,000 barrels of oil equivalent per day (net) and debt-to-capital of 30% at March 31, 2011, and debt-to-cash flow of 1.49 times for the 12 months ended March 31, 2011.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Oil and Gas Companies, which can be found on our website under Methodologies.