Cenovus Energy’s projected production increase in 2025, coupled with upcoming projects like Narrows Lake, positions it for strong operational performance. Its commitment to returning 100% of excess free cash flow to shareholders offers robust shareholder value creation too.
The firm also offers a solid yield and plenty of upside exposure to higher oil and natural gas prices.
Meanwhile, the company’s attractive valuation metrics, including a price-to-cash-flow ratio of just 2.5, suggest significant upside potential, supported by its successful cost optimization initiatives and strengthened balance sheet with reduced net debt.
CENOVUS ENERGY INC. (Toronto symbol CVE) is now Canada’s third-largest producer of oil and natural gas after Canadian Natural Resources and Suncor. That follows its all-stock acquisition of rival oil producer Husky Energy Inc. (Toronto symbol HSE) on January 1, 2021. It also operates refineries in Canada and the U.S.
Cenovus’s production in the three months ended September 30, 2024, fell 3.2% to 771,300 barrels a day (82% oil, 18% gas) from 797,000 barrels a year earlier. That was mainly due to planned maintenance at its Christina Lake oil sands facility.
As well, the benchmark price for Canadian oil sands crude declined 11.3%. As a result, revenue in the quarter fell 2.3%, to $14.25 billion from $14.58 billion. However, that beat the consensus forecast of $13.8 billion.
In the quarter, cash flow also dropped 43.1%, to $1.96 billion from $3.45 billion; cash flow per share declined at a slower rate of 42.0%, to $1.05 from $1.81, on fewer shares outstanding. That missed the consensus estimate of $1.10 a share. The lower cash flow was largely because the company temporarily shut down its refinery in Lima, Ohio for planned maintenance. It has since completed those upgrades.
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Energy Stocks: Cenovus’ debt nears an important threshold for payouts
Cenovus expects to spend between $4.6 billion and $5.0 billion on exploration and upgrades in 2025. That’s higher than its projected 2024 spending of $4.5 billion to $5.0 billion.
About $1.8 billion of that 2025 spending will go toward growth projects, such as its Narrows Lake oil sands project.
The company’s improving balance sheet will support those investments. Its net debt (total debt less cash balances) at the end of the quarter was $4.20 billion compared to $13.1 billion immediately following the Husky acquisition.
Under its new shareholder return framework, when net debt is below $4.0 billion, Cenovus will return 100% of its free cash flow (after capital expenditures) to shareholders in the form of higher dividends and share buybacks.
If net debt rises above $4.0 billion in a future quarter, Cenovus will not automatically revert to the old policy of returning 50% of free cash flow. Instead, it will deduct the amount by which the previous quarter’s net debt exceeded $4.0 billion from the 100% payout. This new policy will give it more flexibility to manage future investments and debt levels.
Under its new plan, Cenovus raised its base quarterly dividend by 28.6%. Starting with the June 2024 payment, investors now receive $0.18 a share instead of $0.14. The new annual rate of $0.72 yields 3.5%. The company also paid investors a variable dividend of $0.135 a share on May 31, 2024.
The company now expects its production in 2025 will range between 805,000 and 845,000 barrels a day. That’s up from its 2024 forecast of 785,000 to 810,00 barrels a day.
The stock trades at just 2.5 times its forecast 2025 cash flow of $5.74 U.S a share.
Recommendation in The Successful Investor: Cenovus Energy Inc. is a buy.
