Oil prices have soared from around $18 U.S. a barrel in 1993 to around $97 U.S. today. However, new drilling technologies have made it easier to extract oil from hard-to-reach deposits, such as oil sands and shale rock formations. Rising production from these sources could hurt oil prices in the same way the shale gas boom has depressed natural gas prices.
Even so, Canada’s leading oil producers are investing for the long term and continue to expand their oil sands operations. This is the second of our two daily posts on oil sands producers we cover regularly in The Successful Investor. For our previous report on Imperial Oil click here to see the article.
CENOVUS ENERGY INC. (Toronto symbol CVE; www.cenovus.com) gets 60% of its production from its three heavy oil projects in Alberta and one in Saskatchewan. Conventional oil and natural gas wells supply the remaining 40%.
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.
Cenovus Energy took its present form on December 1, 2009, after the old EnCana Corp. split itself into two new companies: Cenovus, which specializes in oil sands, and the new Encana (see box at right), which focuses on natural gas. Lower gas prices have pushed Encana’s shares down by about 30% since the split, but Cenovus’s stock is up about 19%.
Energy stocks: Natural gas production falls as Cenovus continues to shift focus to oil sands
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 operations 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.
In the three months ended September 30, 2013, Cenovus produced 264,100 barrels of oil equivalent a day (67% oil and 33% gas), down 1.3% from 267,500 barrels a year earlier.
The decline was mainly due to planned maintenance at Foster Creek, which cut its output by 22.2%. As well, Cenovus’s natural gas production fell 9.4% as the company continued to shift its focus toward its more profitable oil sands operations. However, a new phase at Christina Lake pushed up that project’s output by 65.6%.
Increased maintenance costs at Foster Creek cut Cenovus’s earnings by 27.5%, to $313 million, or $0.41 a share. A year earlier, it earned $432 million, or $0.57 a share. Cash flow per share declined 16.3%, to $1.23 from $1.47. However, revenue increased by 16.9%, to $5.1 billion from $4.3 billion.
The company’s $0.97 dividend yields 3.2%.
In the latest edition of The Successful Investor, we examine Cenovus’s long-term prospects and how long its reserves will last. We also forecast next year’s cash flow per share for the company and look at whether its shares can keep rising. We conclude with our clear buy-sell-hold advice on the stock.
(Note: If you are a current subscriber to The Successful Investor, please click here to view Pat’s recommendation in the latest issue. Be sure to log in first.)
If you’re a member of Pat’s Inner Circle and you’d like to ask a question about today’s article, please go to the question page reserved for you (be sure you’re logged in first). Click here to ask your question.
COMMENTS PLEASE—Share your investment knowledge and opinions with fellow TSINetwork.ca members
Canadian investors may face a dilemma of sorts with the successful exploitation of our own oil reserves contributing to a possible decline in the price of oil. Would a lowering of oil prices cause you to sell oil stocks you have now? Do you hold oil stocks over the longer term, or do you look for a short-term surge in profits?
Comments
Attila
It doesn’t seem to be prudent to mindlessly increase extraction of oil/gas when we don’t have have to reduce the price. It seems there isn’t enough for market in NA, we don’t yet have the infrastructure to ship to where the stuff is needed. May be we should build out the shipping terminals in a hurry (oil/LNG) rather than waste resources by flaring.
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It doesn’t seem to be prudent to mindlessly increase extraction of oil/gas when we don’t have have to reduce the price. It seems there isn’t enough for market in NA, we don’t yet have the infrastructure to ship to where the stuff is needed. May be we should build out the shipping terminals in a hurry (oil/LNG) rather than waste resources by flaring.