CENOVUS ENERGY INC. $19 (Toronto symbol CVE; Conservative Growth Portfolio, Resources sector; Shares outstanding: 833.2 million; Market cap: $15.8 billion; Price-to-sales ratio: 1.0; Dividend yield: 3.4%; TSINetwork Rating: Average) gets 35% of its revenue from its Western Canadian oil sands properties and conventional oil and gas wells. Chief among these assets are its 50%-owned Christina Lake and Foster Creek oil sands projects; ConocoPhilips (New York symbol COP) owns the remaining 50%.
Refining supplies the remaining 65% of Cenovus’s revenue. The company ships its oil to its 50%-owned refineries in Illinois and Texas. Phillips 66 (New York symbol PSX) owns the other 50% of these operations. Cenovus’s refineries help cut its exposure to falling oil prices, as cheaper crude lowers their operating costs.
Cenovus still plans to spend $1.8 billion to $2.0 billion on expansions and upgrades in 2015, unchanged from its previous estimate. These projects should add 50,000 barrels a day to its production by the end of 2016.
The company is also freeing up cash by selling less important assets. For example, it recently sold lands in Alberta, Saskatchewan and Manitoba to the Ontario Teachers’ Pension Plan.
Cenovus collected royalties from firms that drill for oil and gas on these properties.
The company received $3.3 billion, which it plans to put toward its long-term debt of $5.9 billion (as of June 30, 2015). That’s equal to 37% of its current market cap.
Meanwhile, the company produced 274,954 barrels a day (73% oil and 27% gas) in the second quarter of 2015, down 3.9% from 286,188 a year earlier. As well, its realized oil prices fell 34.6%, while gas prices dropped 33.8%.
The lower production and prices cut Cenovus’s earnings by 68.1%, to $151 million, or $0.18 a share. A year earlier, it earned $473 million, or $0.62. Cash flow per share declined 63.1%, to $0.58 from $1.57.
Cenovus has laid off workers and found other efficiencies, which should lower its operating costs by $280 million this year. It’s also conserving cash through a 39.9% cut to its dividend. The new annual rate of $0.64 a share yields 3.4%.
These actions put the company in a better position to stay profitable until oil prices recover. The stock also trades at a low 7.1 times Cenovus’s projected 2015 cash flow of $2.67 a share.
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