CENOVUS ENERGY INC. $29 (Toronto symbol CVE; Conservative Growth Portfolio, Resources sector; Shares outstanding: 751.8 million; Market cap: $21.8 billion; Price-to-sales ratio: 1.7; Dividend yield: 2.8%; SI Rating: Extra Risk) operates three oil-sands properties in Alberta, and one in Saskatchewan. Cenovus ships the heavy bitumen from these projects to refineries in Illinois and Texas. ConocoPhillips (New York symbol COP) owns 50% of these refineries, as well as 50% of Cenovus’ two main oil-sands projects. Cenovus also owns conventional oil and natural-gas properties.
Cenovus’ proved oil and gas reserves will last 14.7 years. These large reserves mean that Cenovus does not need to spend heavily on exploration. That cuts its risk. Moreover, its steam-assisted gravity draining drilling technology should spur its long-term earnings. That’s because this process makes it easier to extract more heavy oil.
Focus on proven properties cuts risk
Rather than pursue acquisitions, Cenovus plans to focus on developing its own oil-sands properties in northern Alberta. To help pay for these projects, it aims to raise $500 million this year by selling some of its conventional oil and gas properties.
In the three months ended June 30, 2010, Cenovus’ earnings per share fell 72.1%, to $0.19 from $0.68 a year earlier. These figures exclude gains and losses on hedging contracts. They also exclude foreign-exchange gains and losses. Cash flow per share fell 43.7%, to $0.71 from $1.26.
The company’s oil refineries had to pay higher prices for crude oil during the quarter. That was the main reason for Cenovus’ lower earnings and cash flow.
As well, Cenovus sold its gas for an average price of $5.00 per thousand cubic feet in the latest quarter. That’s down 38.5% from $8.13 a year earlier. Oil prices were flat, at $59.11 per barrel.
The stock trades at 19.9 times Cenovus’ likely 2010 earnings of $1.46 a share. It also trades at 8.6 times its forecast cash flow per share of $3.36.
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