Rising production and higher crude oil prices have let this firm cut its debt, improve its cash flow and raise its dividend payout.
A pair of recent acquisitions should allow for even further production expansion once projects are built and brought online.
The stock trades at just 3.5 times the company’s 2022 cash flow forecast.
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CENOVUS ENERGY INC. (Toronto symbol CVE; www.cenovus.com) is now Canada’s third-largest producer of oil and natural gas following 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.
As part of the Husky takeover, Cenovus acquired control of the West White Rose offshore drilling project near Newfoundland.
In April 2020, Husky suspended the project due to the COVID-19 pandemic and the sharp drop in crude oil prices.
However, in light of higher crude prices, Cenovus and its partners (including Suncor, see below) decided to re-start the project.
Under the terms of this new arrangement, Cenovus will cut its stake in the original White Rose field to 60.0% from 72.5%, and to 56.375% from 68.875% in the West White Rose extensions.
Cenovus estimates that its share of the construction costs will range from $2.0 billion to $2.3 billion. To put that in context, its cash flow was $2.58 billion, or $1.30 a share, in the three months ended March 31, 2022.
The West White Rose project is about 65% complete. Cenovus expects it will begin producing in the first half of 2026. The new field’s reserves should last 14 years.
West White Rose should increase Cenovus’s output by 45,000 barrels a day when it reaches peak production by the end of 2029.
Energy Stocks: Rising production and higher selling prices will cut debt
The company recently agreed to buy the 50% of the Sunrise oil sands property in northern Alberta that it doesn’t already own from U.K.-based oil giant BP plc (New York symbol BP).
In exchange, Cenovus will pay $600 million in cash, plus up to an additional $600 million over the next two years. The company will also transfer its 35% in the undeveloped Bay du Nord project offshore project near Newfoundland to BP.
To put those payments in context, Cenovus’s cash flow totalled $2.58 billion, or $1.30 a share, in the first quarter of 2022.
Cenovus expects to complete the transaction in the third quarter of 2022.
Owning 100% of Sunrise will make it easier for Cenovus to increase the project’s daily output from 50,000 barrels currently to 60,000 barrels over the next few years. In the latest quarter, the company produced an average of 798,600 barrels a day (82% oil, 18% natural gas). The new operations should also immediately add to its cash flow.
Cenovus is using its rising production and higher crude prices to cut its net debt from $8.45 billion as of March 31, 2022 to $2.3 billion by the end of the year. The company’s goal is to return 100% of its free cash flow to shareholders once net debt falls below $4 billion compared to its current level of 50%.
Shareholders are already benefiting from that plan. With the June 2022 payment, Cenovus tripled your quarterly dividend to $0.105 a share from $0.035. The new annual rate of $0.42 yields 1.9%. The company will also spend roughly $2.8 billion on share buybacks in the last nine months of 2022.
Investors can expect Cenovus’s cash flow per share will total $6.25 in 2022, and the stock trades at 3.5 times that forecast.
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