Oil prices shot up to over $120 U.S. a barrel in the wake of Russia’s invasion of Ukraine but have since eased to around $84 U.S. Despite that drop, Cenovus continues to pay down its debt. That improving balance sheet also sets you up for even higher dividends and buybacks, even if oil falls to $45 U.S.
CENOVUS ENERGY INC. $26 is a buy. The company (Toronto symbol CVE; Conservative Growth Portfolio, Resources sector; Shares outstanding: 1.9 billion; Market cap: $49.4 billion; Price-to-sales ratio: 0.9; Dividend yield 2.2%; TSINetwork Rating: Average; 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. Oil now accounts for 83% of Cenovus’s overall output, with natural gas supplying the remaining 17%. It reserves should last 31 years. It also operates refineries in Canada and the U.S.
Cenovus’s revenue fell 35.0%, from $20.84 billion in 2018 to $13.54 billion in 2020, mainly due to a sharp drop in oil prices as a result of COVID-19 lockdowns. As a result of the Husky purchase, revenue shot up 242.3% to $46.36 billion in 2021. Thanks to the purchase of the 50% of the Sunrise oil sands project Cenovus didn’t already own and a 46.0% jump in its realized oil price, revenue rose a further 44.3% to $66.90 billion in 2022.
Cash flow rose 115.0%, from $1.40 a share (or $1.72 billion) in 2018 to $3.01 a share (or $3.70 billion) in 2020. Cash flow dropped to $0.10 a share (or $147 million) in 2020, but jumped to $3.54 (or $7.25 billion) in 2021 and improved again to $5.47 a share (or $7.25 billion) in 2022.
Cenovus’s production in the three months ended June 30, 2023, fell 6.3% as wildfires in northern Alberta forced it to lower output. As well, oil prices are down 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).
For all of 2023, Cenovus expects to spend between $4.0 billion and $4.5 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 $6.37 billion compared to $13.1 billion immediately following the Husky acquisition.
More dividend hikes on the way
Thanks to that lower debt level, Cenovus is now returning 50% of its free cash flow (after capital expenditures) to shareholders in the form of higher dividends and share buybacks. With the June 2023 payment, the company raised your quarterly dividend by 33.3%, to $0.14 a share from $0.105. The new annual rate of $0.56 yields 2.2%.
Once its net debt is below $4.0 billion, Cenovus plans to return 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 5.7 times that forecast.
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