I still have some details to nail down, but I think Q2 was a solid quarter .
I posted my estimate of Q2 FCF of 2.5+ billion before CVE reported. The actual 2.3 FCF missed my lower bound strictly due to cash taxes about 200 million higher than expected. Management stated they expected Q3 and Q4 cash taxes to normalize 200+ million lower than in Q2.
We knew about the turnarounds, but Q2 throughput was lower than I expected. The Canadian turnaround cost a "one-time" 100 million during the quarter that won't be repeated in Q3 and Q4. Operating expenses were $20/bbl for the quarter, compared to about 10 in Q1 and under 8 in Q2 2021. So operating expenses ran about 10/bbl high in Q2. If you multiply Canadian throughput (110k/bbls per day) by the 90-day count and the 10 extra cost, you get an extra 100 million in costs in Q2.
In the US, refinery utilization was 75%. This will jump by 7%+ in Q3 and Q4. Sales volume will go from 390k per day to something around 440k. The company is guiding to a throughput of 550k per day in 2022, so there may be some catch-up in Q3 and Q4. Refining margins in the US were 44.80/bbl, which is very good considering operating cost were elevated by about $6 per barrel. US downstream was light by about 200 million because of elevated turnaround costs.
It is difficult to compare the downstream operations of SU and CVE. This is especially true when CVE experienced a much greater turnaround impact during Q2. SU has a natural refinery margin advantage because of exposure to east coast pricing. CVE and SU have different input and output mixes.
As CVE is unhedged, commodity volatility translates directly to the bottom line. My best guess for Q3 is that lower taxes will about offset lower pricing in terms of FCF. So if we start with 2.3 billion FCF reported in Q2, we just need to adjust for the unwind of refinery turnaround and hedging losses. At this stage, I am using 2.5+ billion again as my FCF estimate for Q3. Whether or not CVE can get to 4 billion in net debt by year-end is up in the air. My lower bound estimates of FCF get the net debt to 5.1 billion at year-end. The 4 billion debt target should be reached by end of Q1 2023.
As a run rate going forward, I am currently using 8 billion FCF annually, all of which will be returned to shareholders after Q1 2023. Plug in your equilibrium yield assumption to get a target price for CVE. My target is 40 Canadian.