CENOVUS ENERGY INC. $31 (New York symbol CVE; Conservative Growth Portfolio, Resources sector; Shares outstanding: 756.5 million; Market cap: $23.4 billion; Price-to-sales ratio: 1.3; Dividend yield: 3.2%; TSINetwork Rating: Average; www.cenovus.com) gets 40% of its output from its Alberta oil sands projects. Conventional oil and 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. 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. The company produced 286,188 barrels of oil equivalent a day (70% oil and 30% gas) in the second quarter of 2014, up 9.9% from 260,460 a year ago.
That’s mainly because a new phase at Christina Lake is reaching full capacity, raising the project’s production by 77%. As well, output at Foster Creek rose 3%. These gains helped offset a 5% decline in natural gas production.
The higher output and increased oil and gas prices pushed up Cenovus’s earnings by 85.5%, to $473 million, or $0.62 a share (all amounts except share price and market cap in Canadian dollars). A year earlier, it earned $255 million, or $0.34 a share.
Cash flow per share gained 36.5%, to $1.57 from $1.15. Revenue increased 20.1%, to $5.4 billion from $4.5 billion.
A lack of pipeline capacity is forcing Cenovus to ship more of its oil by rail, which could increase its costs. However, the rail shipments are letting the company sell more oil directly to customers in the U.S. Midwest and on the Gulf Coast, where prices are generally higher than in Alberta.
The stock trades at a reasonable 17.1 times the $1.97 a share that Cenovus should earn in 2014. It also trades at 6.2 times the company’s likely cash flow of $5.45 a share. The $1.065 dividend yields 3.2%.
Cenovus is a buy.
