Cenovus Energy has announced a bold investment plan by spending between $4.5 billion and $5.0 billion this year to increase processing capacity at its refineries by 17% while production and ultimately free cash flow should also soar.
The company’s shares have risen 29% this year already as the market digests these implications.
Meanwhile, the stock still trades at just 5.0 times the company’s 2024 cash flow forecast.
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CENOVUS ENERGY (Toronto symbol CVE; www.cenovus.com) 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. Its reserves should last 31 years. It also operates refineries in Canada and the U.S.
Cenovus’s production in the three months ended March 31, 2024, rose 2.8% to 800,900 barrels a day (82% oil, 18% gas) from 779,000 barrels a year earlier.
As well, the company’s realized crude price jumped 30.9%. As a result, revenue in the quarter rose 9.3%, to $13.40 billion from $12.26 billion. However, that missed the consensus forecast of $13.52 billion.
Cash flow also jumped 60.7%, to $2.24 billion from $1.40 billion; cash flow per share rose at a faster rate of 67.6%, to $1.19 from $0.71, on fewer shares outstanding. That topped the consensus estimate of $1.13 a share.
For all of 2024, Cenovus expects to spend between $4.5 billion and $5.0 billion on exploration and upgrades.
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 $4.83 billion compared to $13.1 billion immediately following the Husky acquisition.
Cenovus has now modified its shareholder return framework. Right now, it is returning 50% of its free cash flow (after capital expenditures) to shareholders in the form of higher dividends and share buybacks.
Once its net debt is below $4.0 billion, Cenovus plans to return 100% of its free cash flow to shareholders.
Under the new plan, if net rises above $4.0 billion in a future quarter, Cenovus will not automatically revert to the 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.
As a result of the new plan, Cenovus is raising your quarterly dividend by 28.6%. With the June 2024 payment, investors will receive $0.18 a share instead of $0.14. The new annual rate of $from $0.105. The new annual rate of $0.72 yields 2.5%.
The company will also pay investors a variable dividend of $0.135 a share on May 31, 2024.
For all of 2024, Cenovus’s cash flow per share will probably rise about 24% to $5.67. The stock trades at an attractive 5.0 times that forecast.
Recommendation in The Successful Investor: Cenovus Energy Inc. is a buy.
