CENOVUS ENERGY INC. $29 - Toronto symbol CVE

CENOVUS ENERGY INC. $29 (Toronto symbol CVE; Conservative Growth Portfolio, Resources sector; Shares outstanding: 757.1 million; Market cap: $22.0 billion; Price-to-sales ratio: 1.0; Dividend yield: 3.7%; TSINetwork Rating: Average; www.cenovus.comtarget=”_blank”) gets 40% of its revenue from its oil sands projects and conventional oil and gas wells in western Canada. These properties’ reserves should last 24 years.

Refining supplies the remaining 60% 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.

Thanks to higher production and oil prices, Cenovus’s revenue increased 62.0%, from $11.5 billion in 2009 to $18.7 billion in 2013. Even with the recent oil price decline, its revenue should rise to around $20 billion in 2014.

Earnings jumped 50.5%, from $1.09 a share (or a total of $818 million) in 2009 to $1.64 a share (or $1.2 billion) in 2011. A writedown cut profits to $1.14 a share (or $868 million) in 2012, but they rose to $1.55 a share (or $1.2 billion) in 2013.

Cash flow per share fell from $3.79 in 2009 to $3.20 in 2010. It recovered to $4.80 in 2012, then slipped to $4.76 in 2013.

Oil sands production on the rise

U.S.-based ConocoPhillips (New York symbol COP) owns 50% of Cenovus’s main Foster Creek and Christina Lake oil sands properties.

The company recently opened a new phase at Foster Creek. This latest stage should add 30,000 barrels a day (15,000 to Cenovus) in the next 12 to 18 months.

Future phases should raise Foster Creek’s output to 210,000 barrels a day (105,000 to Cenovus) by 2016. To put that in context, Cenovus’s daily crude production averaged 199,089 barrels in the quarter ended September 30, 2014.

Oil sands projects are more expensive to build and operate than regular fields, but Cenovus and ConocoPhillips have redesigned these expansions to make them more efficient. As a result, Cenovus will likely spend $3.1 billion to expand and upgrade its operations in 2014, down from $3.3 billion in 2013.

Cenovus can easily afford these investments. As of September 30, 2014, its long-term debt was $5.3 billion, or a moderate 24% of its market cap. It also held cash of $1.2 billion, or $1.53 a share.

The stock trades at 15.6 times Cenovus’s forecast 2014 earnings of $1.86 a share, and at just 5.7 times its likely cash flow of $5.08 a share. The improving cash flow also gives Cenovus room to increase its $1.065 dividend, which yields 3.7%.

Cenovus is a buy.

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