CENOVUS ENERGY INC. $32 - Toronto symbol CVE

CENOVUS ENERGY INC. $32 (Toronto symbol CVE; Conservative Growth Portfolio, Resources sector; Shares outstanding: 756.5 million; Market cap: $24.5 billion; Price-to-sales ratio: 1.3; Dividend yield: 3.3%; TSINetwork Rating: Average; www.cenovus.com) gets about 40% of its output from its oil sands projects in Alberta. Conventional oil and natural gas wells supply the other 60%.

U.S.-based ConocoPhillips (New York symbol COP) owns 50% of Cenovus’s main Foster Creek and Christina Lake oil sands projects in Alberta. These properties produce heavy bitumen, which Cenovus ships to its 50%-owned refineries in Illinois and Texas. Phillips 66 (New York symbol PSX) owns the other 50% of these refineries. In 2013, refining accounted for 66% of Cenovus’s revenue and 40% of its earnings.

A long record of successful expansion

Thanks to rising production and oil prices, Cenovus’s revenue increased 62.0%, from $11.5 billion in 2009 to $18.7 billion in 2013. Earnings gained 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 rebounded 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, recovered to $4.80 in 2012, then slipped to $4.76 in 2013.

The company continues to expand its oil sands properties. Regulators have now approved the development of its 100%-owned Grand Rapids project. It will start up in stages, but it should ultimately produce 180,000 barrels a day and last 40 years. This year, Cenovus also hopes to win approval for its 100%-owned Telephone Lake project, which could produce 300,000 barrels a day for 40 years. To put these projects in context, Cenovus produced 267,442 barrels a day in 2013.

Foster Creek showing signs of age

In all, the company expects to spend $2.8 billion to $3.1 billion on upgrades in 2014, compared to $3.3 billion last year.

Part of that will go toward its Foster Creek property, which is now 13 years old. The project’s age and geology has forced Cenovus to use more steam to loosen the bitumen and improve its flow. That has raised the company’s operating costs and forced it to delay expanding Foster Creek.

Cenovus’s strong balance sheet will support its expansion. As of December 31, 2013, its long-term debt was $5.0 billion, or a moderate 20% of its market cap. Cenovus also held cash of $2.45 billion, or $3.24 a share.

Worth the higher p/e

Higher costs at Foster Creek will probably cut the company’s 2014 earnings to $1.53 a share. It trades at 20.9 times that estimate. That’s still reasonable in light of its high-quality reserves and growth prospects. The stock also trades at a moderate 8.7 times Cenovus’s projected cash flow of $3.69 a share. The $1.065 dividend yields 3.3%.

Cenovus is a buy.

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