CENOVUS ENERGY INC. $31 (Toronto symbol CVE; Conservative Growth Portfolio, Resources sector; Shares outstanding: 755.8 million; Market cap: $23.4 billion; Priceto- sales ratio: 1.3; Dividend yield: 3.1%; TSINetwork Rating: Average; www.cenovus.com) operates three heavy oil projects in Alberta and one in Saskatchewan. It gets about half of its output from the oil sands. Conventional oil and natural gas wells supply the other half. The company’s reserves should last 23 years.
U.S.-based ConocoPhillips (New York symbol COP) owns 50% of Cenovus’s main Foster Creek and Christina Lake oil sands projects in Alberta. These properties produce heavy bitumen, which Cenovus ships to its 50%-owned refineries in Illinois and Texas. Phillips 66 (New York symbol PSX) owns the other 50% of these refineries.
Owning refineries helps cut Cenovus’s risk, because they earn higher profits when crude oil prices fall, which offsets lower profits from its main oil production businesses. In 2012, refining accounted for 67% of Cenovus’s revenue and 46% of its earnings.
Making the oil sands more efficient
Cenovus is a pioneer in developing new oil sands extraction technologies, like injecting steam into wells. That melts the heavy, tar-like bitumen and makes it easier to pump to the surface. The company’s expertise in this area, including recycling most of the water it uses, helps keep its operating costs down.
As a separate company, Cenovus’s revenue rose 33.2%, from $12.6 billion in 2010 to $16.8 billion in 2012, as it expanded its oil sands properties. Earnings jumped 54.7%, from $1.06 a share (or a total of $799 million) in 2010 to $1.64 (or $1.2 billion) in 2011. However, higher depreciation and exploration expenses cut its 2012 earnings to $1.14 a share (or $866 million). Cash flow per share rose 50.0%, from $3.20 in 2010 to $4.80 in 2012.
In the three months ended June 30, 2013, Cenovus produced an average of 260,460 barrels of oil equivalent (66% oil and 34% natural gas) a day. That’s up 2.2% from 254,899 barrels a year earlier. The increase helped push up its revenue to $4.5 billion from $4.2 billion.
However, higher spending on new projects and lower natural gas prices caused earnings to fall 10.2%, to $255 million from $284 million. Earnings per share declined at a slower pace of 8.1%, to $0.34 from $0.37. Cash flow per share fell 5.7%, to $1.15 from $1.22.
Oil sands production on the rise
The company continues to invest heavily in its oil sands projects: production from these properties rose 17.5% in the latest quarter. Cenovus plans to increase its oil sands output to 400,000 barrels a day by the end of 2021, compared with 94,000 barrels in the latest quarter. If you include new conventional oil projects, the company’s overall oil output should reach 500,000 barrels a day.
Much of this new production will come from expanding its 50%-owned Foster Creek and Christina Lake operations. Cenovus and ConocoPhillips are also developing a third oil sands project near Christina Lake. Called Narrows Lake, this property should produce 45,000 barrels a day (22,500 barrels to Cenovus) when its initial phase begins operating in 2017. When the partners complete all three phases, Narrows Lake will produce 130,000 barrels a day (65,000 to Cenovus).
Cenovus is also developing two wholly owned oil sands projects in northern Alberta. The company recently received regulatory approval to begin work on its Telephone Lake property, which could eventually add 90,000 barrels a day to its output. Another project, called Grand Rapids, could produce 180,000 barrels a day.
The company is expanding its conventional oil properties, as well. Using techniques it developed for its oil sands wells, Cenovus feels it can increase production at its Pelican Lake operation to 55,000 barrels a day from 23,959 in the second quarter of 2013.
Strong cash flow covers expansion
Cenovus will probably spend $3.3 billion to $3.7 billion annually over the next 10 years to reach its goal, including $3.2 billion this year. It will probably generate cash flow of $3.6 billion in 2013, so it can easily pay for these upgrades.
The company’s strong balance sheet will also help support its ambitious expansion plans. As of June 30, 2013, its long-term debt was $4.9 billion, or a moderate 21% of its market cap. Moreover, no principal payments are due until September 2014, when it must repay $800 million U.S. It also held cash of $825 million, or $1.09 a share.
In addition, Cenovus is raising money for its new projects by selling some of its less important assets. In July 2013, it sold its Shaunavon shale oil property in Saskatchewan for $240 million. The company also expects to sell its Bakken shale oil property in Saskatchewan during the next few months.
The stock trades at 17.5 times the $1.77 a share that Cenovus should earn in 2013. It also trades at 6.6 times the company’s projected cash flow of $4.72 a share. The $0.97 dividend yields 3.1%.
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