While production, revenues and cash flow all dropped in the most recent quarter, we feel all investors should maintain some exposure to oil and gas— here’s Cenovus, a Canadian leader with lots of growth ahead.
The existing cash flow is being used to retire liabilities such as warrants and debt while increasing dividend payouts.
The stock trades at just 5.9 times the company’s 2023 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 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.
Cenovus had to curtail operations at its Rainbow Lake property, 900 kilometres northwest of Edmonton, due to the wildfires in Alberta. That operation produces light crude oil, natural gas and natural gas liquids.
Rainbow Lake’s daily output typically averages 85,000 barrels a day. However, it has now resumed production of just 62,000 barrels a day. The company expects to add another 20,000 barrels in the next two weeks; the remaining 3,000 barrels requires the restoration of power lines and other infrastructure.
That’s part of the reason why Cenovus’s production in the three months ended June 30, 2023, fell 6.3%. As well, oil prices fell 40.8% from a year earlier. As a result, revenue fell 36.2%, to $12.23 billion from $19.17 billion. Cash flow also fell 35.9%, to $0.98 a share (or $190 billion) from $1.53 a share (or $3.10 billion).
Energy Stocks: Cenovus’s cash flow is being used to cut liabilities and reward shareholders
As part of the Husky takeover, Cenovus issued warrants to Husky’s shareholders that let them buy more shares at $6.54 a share before January 1, 2026.
Cenovus recently agreed to repurchase 84.1% of those outstanding warrants from two of Husky’s largest shareholders. If exercised, they would have increased the total number of shares outstanding by 2.4%.
Cenovus will pay $711 million to retire those warrants. To put that outlay in context, the company cash flow was $1.4 billion, or $0.71 a share, in the first quarter of 2023. It expects to complete those purchases by January 5, 2024.
Buying back those warrants will not affect Cenovus’s plan to keep paying down its debt. In fact, the company has cut its net debt (total debt less cash balances) from $13.1 billion just after the Husky acquisition to $6.37 billion as of June 30, 2023.
As a result of that lower debt burden, Cenovus is now returning 50% of its free cash flow (after capital expenditures) to shareholders. Under that policy, it raised your regular quarterly dividend by 33.3% with the June 2023 payment. The new annual rate of $0.56 yields 2.1%.
It’s likely net debt will drop below $4 billion by the end of 2023. As a result, Cenovus will then pay out 100% of its free cash flow to shareholders.
Due to summer wildfires, the company expects its daily production for all of 2023 will decline about 2% from its earlier forecast. As well, investors can expect 2023 cash flow per share to drop about 12% to $4.56. The stock trades at an attractive 5.9 times that forecast.
Recommendation in The Successful Investor: Cenovus Energy Inc. is a buy.