This major Canadian energy stock has seen its shares rise with the price of crude oil.
Ottawa’s move to buy the existing Trans Mountain pipeline in order to build its expansion should be good news for this stock, making it easier to ship to offshore markets. The company’s production has jumped since it acquired full ownership of its oil sands properties a year ago. Meanwhile, its shares trade at a low 3.9 times projected 2018 cash flow.
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CENOVUS ENERGY INC. (Toronto symbol CVE; www.cenovus.com) acquired 100% of its main oil sands properties in Alberta—Christina Lake and Foster Creek—in May 2017. It did that through the purchase of the 50% stake held by its partner in the project, ConocoPhillips (New York symbol COP).
In all, the company paid $17.7 billion for those properties, consisting of $14.1 billion in cash plus 208 million Cenovus common shares. Those shares are worth roughly $2.7 billion, or 17% of Cenovus’s market cap (the total value of all outstanding shares).
As a result of that deal, the company’s production in the first quarter of 2018 jumped 164.9%, to 487,464 barrels a day (81% oil, 19% natural gas) from 184,001 barrels a year earlier.
Despite the higher output, Cenovus lost $752 million, or $0.61 a share, in the quarter. That was much worse than the company’s year-earlier loss of $39 million, or $0.05. Its cash flow per share also worsened to a loss of $0.03 compared to a gain of $0.39 a year earlier.
Cenovus uses futures contracts to lock in the selling prices of its oil. The company purchased those contracts following the ConocoPhillips transaction to cut its exposure to potentially lower oil prices. However, the recent increase in crude prices has hurt the carrying value of those securities. As a result, Cenovus booked a $469 million hedging loss in the latest quarter.
Hedging contracts cover about 80% of the company’s expected production for the first half of 2018. It expects that figure to drop to 37% in the second half as some of those contracts expire.
Energy stocks: Sale of less-important properties helps to pay down debt
Revenue in the latest quarter jumped 30.2%, to $4.6 billion from $3.5 billion. The higher production due to the ConocoPhillips acquisition offset lower realized oil prices in the quarter. However, Cenovus continues to experience delays shipping its crude due to a lack of pipeline and railcar capacity. That limited the revenue gains from sharply higher production.
The company also continues to sell its less-important properties to pay down the loans it needed for the ConocoPhillips acquisition. Cenovus’s long-term debt as of March 31, 2018, was $9.8 billion, or 63% of Cenovus’s market cap. However, that’s down from $12.5 billion as of June 30, 2017. In addition, the company’s debt repayments will be spread out between 2019 and 2047.
Cenovus now plans to spend between $1.5 billion and $1.7 billion on oil and gas exploration for 2018. That includes upgrades to its existing properties. About 70% of that overall spending will go to its oil sands operations.
The spending should lift Cenovus’s production for 2018 to between 483,000 and 510,000 barrels a day. At the same time, better efficiency and cost controls should cut 8% of the operating costs per barrel for its oil sands projects.
Meantime, Cenovus is seeing the benefits of rising oil prices—the stock has gained 57.2% in the past year. Ottawa’s plan to buy the existing Trans Mountain pipeline, and complete construction of a parallel line, should also make it easier for Cenovus to ship its crude to offshore markets.
The stock trades at a low 3.9 times Cenovus’s likely 2018 cash flow of $2.80 a share. The $0.20 dividend yields 1.4%.
Recommendation in The Successful Investor: Cenovus Energy is a buy.
CVE is a good stock but technical indicators indicate the stock price will decline in the near future. I suggest waiting for it to bottom out and then grab it on its way back up
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CVE is a good stock but technical indicators indicate the stock price will decline in the near future. I suggest waiting for it to bottom out and then grab it on its way back up