As oil remains around $40 a barrel, energy stocks continue to scale back their operations. However, integrated oil companies like Cenovus Energy have an advantage over many other firms in the industry thanks to their refineries. Cheaper crude lowers their operating costs. Cenovus has taken steps to save money, including job cuts and improved drilling efficiency. It also sold royalty lands to raise cash. At the same time, Cenovus increased oil production in the most recent quarter with the start-up of two oil sands projects. We believe it should be one of the first energy stocks to bounce back when the price of oil recovers. In the meantime, its dividend, which yields 3.2%, appears secure.
CENOVUS ENERGY INC. (Toronto symbol CVE; www.cenovus.com) gets 35% of its revenue from its Western Canadian oil sands properties and conventional oil and gas wells. Chief among these assets are its 50%-owned Christina Lake and Foster Creek oil sands projects; ConocoPhilips (New York symbol COP) owns the remaining 50%.
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Refining supplies the remaining 65% of Cenovus’s revenue. The company ships its oil to its 50%-owned refineries in Illinois and Texas. Phillips 66 (New York symbol PSX) owns the other 50% of these operations. Cenovus’s refineries help cut its exposure to falling oil prices, as cheaper crude lowers their operating costs.
Cenovus has cut jobs in response to sharply lower oil and natural gas prices. It has also lowered its 2015 capital spending by 40%, to between $1.8 billion and $1.9 billion.
These moves, along with more efficient drilling, will save it $400 million in 2015, up from its earlier forecast of $280 million. Cenovus now plans more job cuts, which should save it a further $100 million a year starting in 2016.
Energy stocks: Start-up of Foster Creek and Christina Lake oil sands projects pushes oil production up 5.7%
Meanwhile, Cenovus’s oil production rose 5.7% in the three months ended September 30, 2015, to 210,422 barrels a day from 199,089 a year earlier. That’s due to the start up of new phases at Foster Creek and Christina Lake.
However, sharply lower oil prices offset the higher production, which is why Cenovus lost $28 million, or $0.03 a share, in the latest quarter. A year earlier, it earned $372 million, or $0.49 a share. Cash flow per share fell 59.2%, to $0.53 from $1.30, while revenue declined 34.1%, to $3.3 billion from $5.0 billion.
Cenovus recently sold its royalty lands in Western Canada for $3.3 billion. As a result, it ended the quarter with cash of $4.4 billion, or $5.28 a share. Its long-term debt of $6.3 billion is a manageable 38% of its market cap.
The company’s improved balance sheet will let it keep paying quarterly dividends of $0.16 a share, for a 3.2% annualized yield. In the latest quarter, dividends accounted for 30.0% of its cash flow.
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