(Public) Cenovus And Suncor Guide To A Strong 2025

By: Jon Costello

Note: Dollar values are in Canadian dollars unless otherwise specified.

Surprise, surprise—it’s another frustrating day for energy investors! Today, it's not that oil prices are falling for no apparent reason. Rather, it's that oil prices are trading higher and E&P stocks are trading lower. No wonder why so many have abandoned the sector.

The culprit for today's price action is Trump’s recent comments in his Time Magazine "Person of the Year" interview, in which he repeated his intention to lower energy prices, as shown in the excerpt below.

Source: Time, Dec. 12, 2024.

The "Trump Trade" has been spectacularly successful over the past few weeks, so why shouldn't investors jump on the bandwagon and sell E&Ps?

However, the selling is widening the chasm between E&P stock prices and the fundamental outlook. Put aside the fact that oil prices have risen to levels where E&Ps generate free cash flow. Recent news at the company level has been surprisingly bullish. For instance, the oil majors, including Chevron (CVX) and Exxon Mobil (XOM), have announced 2025 guidance that includes slight production growth and capital restraint—exactly what their shareholders want to see. Given the outlook for large E&Ps and our constructive outlook for macro fundamentals, we expect E&P stocks to outperform once sentiment inflects positively.

Two of our favorite large-cap E&Ps, Cenovus Energy (CVE) and Suncor Energy (SU), also announced 2025 production and capex guidance that shows both companies building on their strengths. Their fundamental performance is set to improve throughout the year, growing free cash flow generation capacity and building value for shareholders. Their strong outlook bodes well for their stocks once sentiment improves.

Cenovus Focuses on Upstream

CVE’s 2025 capital budget and production guidance were in line with our expectations, with no surprises. The company will focus primarily on boosting upstream production. Of the $1.6 billion budgeted for total growth capex, approximately $1 billion will be directed toward completing the offshore West White Rose project. The project is expected to begin production in the first quarter and ramp higher over subsequent quarters. At full capacity, West White Rose’s contribution to CVE’s production will increase until it reaches 45,000 boe/d.

The remaining $600 million of CVE's 2025 growth capex will be directed toward its oil sands operations. Its Foster Creek optimization project should be completed during the year. Its Narrows Lake tie-back is nearly complete and will commence production around mid-year.

Importantly, 2025 is expected to be the final year in CVE’s three-year investment cycle. The investments made during the 2023-2025 timeframe will drive production 150,000 boe/d higher. Free cash flow will increase significantly as production increases while capex declines.

CVE’s growth projects are expected to increase 2025 production to 825,000 boe/d, up 4% from 2024 levels. The growth will bring a sustained boost in the company’s cash flow generation potential.

CVE plans to spend $3.2 billion on maintenance capex. It is guiding for downstream throughput in the range of 650,000 to 685,000 bbl/d at 92.5% utilization, which is in line with consensus estimates. U.S. downstream volumes are expected to be up 2% year-over-year. Turnarounds are expected to reduce throughput by 15,000 bbl/d, around half the volumetric impact they had in 2024. As a result, downstream volumes in 2025 should increase by a few percentage points over 2024.

It’s unclear what portion of capex will be aimed at improving refinery reliability, but we expect the significant sums spent over the past few years to bear fruit in 2025. In light of CVE’s horrible share price performance—a great deal of which is related to its downstream underperformance—next year is shaping up to be make-or-break for management. In my view, either management improves CVE’s downstream operation to its long-term potential or the company divests its refineries. The latter scenario could also involve a change in management.

CVE intends to reduce downstream operating expenses by 7% versus 2024. When coupled with higher production, the improved cost base will increase cash flow and cash flow torque to higher oil prices.

For our part, we want to see downstream demonstrate that it can effectively capture refining margins on a consistent basis. Doing so will take the downstream segment from being a drag on EBITDA to a contributor.

CVE stock price fails to discount any of these improvements. We expect CVE to generate approximately $10.5 billion in cash flow with WTI in the mid-US$70s per barrel. Assuming management meets its capex guidance, the company should generate approximately $5.7 billion in free cash flow, all of which will be returned to shareholders. This is equivalent to a 14% free cash flow yield on CVE’s current market cap of $40.0 billion. Of course, the free cash flow yield increases significantly as WTI rises.

We put CVE shares in bargain territory and believe the shares are among the most attractively priced among North American large-cap E&Ps.

Suncor Continues to Bring Down Costs

Like CVE, Suncor Energy’s 2024 budget contained no surprises. It shows the company building on its spectacular performance under CEO Rich Kruger.

Suncor plans to spend $6.2 billion in total capex, 3% less than 2024. The company is guiding to 825,000 bbl/d of production, which is actually 6% below consensus expectations of 830,000 bbl/d. I suspect management is setting a low bar to maintain its ongoing stretch of five consecutive quarters of outperformance.

Suncor is also guiding to 95% refinery utilization in 2025. It expects downstream throughput to increase to 442,500, 1% above 2024.

The highlight of Suncor’s budget was its guidance for a continued decline in operating expenses, which are expected to decline by 7% from 2024. Management remains steadfast in its commitment to reduce Suncor’s operating expenses by $10 per barrel from 2023 levels. Due to its progress, lower operating expenses will be the most significant driver of free cash flow growth next year.

We expect Suncor to generate approximately $7.0 billion of free cash flow with WTI in the mid-US$70s per barrel, equivalent to a 10.4% yield on its $67.3 billion market cap. Like CVE, Suncor has already hit its net debt target, so 100% of free cash flow will be returned to shareholders.

Suncor shares trade at a discount to value—particularly if oil prices rise to reflect the fundamental outlook, as we expect—but CVE trades at a significantly greater discount. To be sure, CVE has its downstream operating headwinds, but as these get resolved one way or another, we expect its shares to outperform its large-cap E&P peers from current levels.

Conclusion

You’d never know it from E&P stock price performance, but the fundamental outlook is bright. Both CVE's and Suncor's business results stand to improve, which bodes well for free cash flow growth, dividends, and share repurchases in 2025 and beyond. Investors willing to capitalize on today's dour sentiment should consider buying shares of both before their improving results push their share prices higher.

Analyst's Disclosure: Jon Costello has a beneficial long position in the shares of CVE, SU either through stock ownership, options, or other derivatives.