This oil sands leader suffered a loss in the recent quarter, but its stronger production and integrated operations—including U.S. refineries—position it for strong growth as Canadian oil prices recover.
For now, the company continues to pay down its debt and waits for an Alberta-mandated production cut to expire later this year.
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CENOVUS ENERGY INC.(Toronto symbol CVE www.cenovus.com) acquired 100% of its main Alberta oil sands properties—Christina Lake and Foster Creek—in May 2017. It paid ConocoPhillips (New York symbol COP) $17.7 billion in cash and stock for its 50% stake.
The Alberta government has ordered oil producers in the province to cut their total daily output by 325,000 barrels, or 8.7%. That’s because a lack of pipeline capacity has led to a glut of stored crude in the province and helped to push down the price for Western Canadian crude. This excess supply had expanded the gap between the benchmark crude oil price in the U.S. and the price oil producers in Western Canada receive. In the third quarter of 2018, Cenovus’s price gap worsened to $22.25 a barrel from $9.94 a year earlier.
Alberta will let producers increase their overall output once the current supply is depleted. The government should remove the cap altogether by the end of 2019. That’s when Enbridge’s new Line 3 pipeline begins operating.
Cenovus’s production in the third quarter of 2018 rose 3.5%, to 495,592 barrels (83% oil, 17% gas) from 487,817 barrels a year earlier. However, due to hedging losses, cash flow fell 1.3%, to $0.79 a share from $0.80.
The company has already slowed its production in response to weak crude prices, so it should have little trouble complying with the new regulations. As well, it still owns 50% of two refineries in the U.S., which have benefited from the drop in Canadian oil prices.
Energy Stocks: Debt drops despite a quarterly loss and reduced cash flow
Large producers like Cenovus will share in the benefits of higher prices for Western Canadian crude when they arrive. Still, they will bear the bulk of the government-imposed production cuts. In the latest quarter, Cenovus’s two oil sands properties produced an average of 376,672 barrels a day. That’s up 3.9% from 362,494 barrels in the year-earlier quarter.
However, the company lost $0.03 a share in the quarter. That missed the consensus estimate of $0.21 profit. The decline is mainly due to extra provisions for unprofitable contracts and unfavourable foreign exchange rates. A year earlier, Cenovus earned $0.20 a share. The company’s cash flow per share also declined 1.3%, to $0.79 from $0.80.
Cenovus continues to cut its debt following its purchase of the ConocoPhillips stake. Its long-term debt as of September 30, 2018, was $8.8 billion—down 7.6% since the start of the year. That debt is nonetheless high, although it’s a manageable 62% of the company’s market cap.
TSI continually advises readers to invest in oil sands producers. The rationale: “position it for strong growth as Canadian oil prices recover.”
This is, literally, a pipe dream. I don’t see prices increasing sufficiently until at least one of the proposed pipelines is built, to take the product to market in an economical and efficient way. The way things look, that is at least five years away (time for agreement/approval process, plus time for construction).
Thanks for your comment. We do think that exposure to oilsands will pay off for investors—and especially with integrated energy stocks like Suncor where oilsands are just one component of their overall business.
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TSI continually advises readers to invest in oil sands producers. The rationale: “position it for strong growth as Canadian oil prices recover.”
This is, literally, a pipe dream. I don’t see prices increasing sufficiently until at least one of the proposed pipelines is built, to take the product to market in an economical and efficient way. The way things look, that is at least five years away (time for agreement/approval process, plus time for construction).
Thanks for your comment. We do think that exposure to oilsands will pay off for investors—and especially with integrated energy stocks like Suncor where oilsands are just one component of their overall business.
Clear, concise and right to the point ( recommendation), that is. I like it.