CENOVUS ENERGY INC. $33 (Toronto symbol CVE; Conservative Growth Portfolio, Resources sector; Shares outstanding: 753.9 million; Market cap: $24.9 billion; Price-to-sales ratio: 1.8; Dividend yield: 2.4%; TSINetwork Rating: Extra Risk; www.cenovus.com) 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.
The company has received approval from regulators to expand its Christina Lake oil-sands project in Alberta. It will build this project in three phases; each phase will add 40,000 barrels per day to Christina Lake’s current production of 18,000 barrels per day. Cenovus will complete the first phase in 2014, the second phase in 2016 and the third phase in 2017.
This expansion will cost a total of $2.7 billion (Cenovus’ share is $1.35 billion). To put this figure in context, Cenovus earned $209 million, or $0.28 a share, in the three months ended March 31, 2011. That’s down 40.8% from $353 million, or $0.47 a share, a year earlier.
These figures exclude gains and losses on hedging contracts that Cenovus uses to lock in prices for part of its oil and natural-gas production. They also exclude foreign-exchange gains and losses. Cash flow per share fell 5.2%, to $0.91 from $0.96.
Cenovus sold its oil at an average price of $62.63 per barrel (after hedging) in the latest quarter, down 8.0% from $68.09 a year earlier. That’s mainly because maintenance on a major oil pipeline hurt its ability to deliver oil to the U.S. This increased the supply of western Canadian crude, and drove down the price compared to oil produced in the U.S. This line is now operating at full capacity. That should increase Cenovus’ earnings in the second quarter.
The company has hedged 52% of its oil production for 2011 at around $89 a barrel. It has also locked in prices for 17% of its likely 2012 production at around $97 a barrel.
The stock has gained 30% since the old EnCana spun it off in December 2009. It trades at a high 23.4 times its forecast 2011 earnings of $1.41 a share. However, it trades at a more reasonable 9.2 times its likely 2011 cash flow of $3.57 a share.
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