This major Canadian energy producer has increased its commitment to the oil sands with a big buyout of its U.S. partner. At the same time, Cenovus Energy has cut its oil sands operating costs by 30% a barrel.
These developments have had immediate results in greater production and higher revenue in the most recent quarter. They should also help cushion the company against declines in the price of crude oil. In the meantime, the dividend appears secure and yields 2.0%.
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CENOVUS ENERGY INC., (Toronto symbol CVE; www.cenovus.com) recently acquired 100% of its main oil sands properties in Alberta—Christina Lake and Foster Creek. It did that by buying the 50% stake held by its partner in the project, ConocoPhillips (New York symbol COP). Cenovus also purchased ConocoPhillips’ conventional oil fields in Alberta and B.C.
In all, the company paid $17.7 billion, consisting of $14.1 billion in cash plus 208 million Cenovus common shares.
Note: Cenovus continues to ship crude to its 50%-owned oil refineries in Illinois and Texas. Phillips 66 (New York symbol PSX) owns the other 50%.
The company borrowed most of the cash it needed to complete the purchase. As a result, Cenovus’s total debt of $12.5 billion (as of June 30, 2017) is just slightly above its $12.1 billion market cap (the total value of all outstanding shares).
To help pay down that debt, the company has agreed to sell its Pelican Lake heavy oil operations in northern Alberta to Canadian Natural Resources Ltd. (Toronto symbol CNQ). Cenovus will receive $975 million when it completes the transaction by September 30, 2017.
Energy Stocks: Oil sands buyout spurs 65% jump in production
The Pelican Lake sale is part of the company’s plan to sell between $4 billion and $5 billion worth of its less-important properties. Those assets yet to be sold include Cenovus’s Weyburn (in Saskatchewan), Palliser (Alberta) and Suffield (Alberta) conventional oil and gas operations. The company aims to complete all of those transactions by the end of 2017.
As a result of its purchases from ConocoPhillips, Cenovus’s output in the three months ended June 30, 2017, jumped 65.1%, to 436,929 barrels a day from 264,580 a year earlier. Oil sands projects accounted for 60% of that output.
Revenue in the quarter also rose 47.0%, to $4.0 billion from $2.7 billion a year earlier. Earnings improved to $305 million, or $0.31 a share, compared to last year’s loss of $3 million, or nil per share. Cash flow per share gained 34.0%, to $0.71 from $0.53.
The company borrowed most of the cash it needed to complete its recent purchases. As a result, Cenovus’s total debt as of June 30, 2017, was $13.4 billion, or a high 112% of its market cap.
Cenovus’s improving efficiency should help it cope with any decline in crude prices: since the start of 2014, the company has reduced its oil sands operating costs per barrel by 30%. Moreover, Cenovus has cut its planned 2017 capital spending by $200 million, to $1.7 billion. Its $0.20 dividend seems safe and yields 2.0%.
Recommendation in The Successful Investor: Cenovus is still a buy for long-term gains.
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I find your reports very helpful.
Have been buying Alta gas ALA-tsx what are your thoughts on this company. thank you Hil