Cenovus Energy: Can Oil Prices Hold?

Cenovus Energy (CVE) delivers gas and oil. Its activities include the development, production and marketing of crude oil, natural gas liquids (NGLS) and natural gas in Canada.

It operates through four segments: Oil Sands, Deep Basins, Refining and Marketing, and Enterprise and Eliminations.

The Oil Sands segment includes bitumen development and production in northeastern Alberta, including Foster Creek, Christina Lake and Narrows Lake, as well as early-stage development projects.

The Deep Basin segment includes land primarily in the Elmworth-Wapiti, Kaybob-Edson and Clearwater operating areas.

The Refining and Marketing segment transports and sells crude oil, natural gas and NGLS.

The Corporate and Eliminations segment includes unrealized gains and losses recorded on derivative financial instruments, disposal of assets, as well as other administrative, financing and research activities. The company was founded in 1881 and is headquartered in Calgary, Canada.

Cenovus Energy shares have a year-over-year return of around 160% and are up nearly 26% in 2022. I am neutral on the CVE stock.

The rally in oil prices has benefited the stock, but in the scenario of oil prices falling from seven-year highs, profitability remains fragile for Cenovus Energy.

Oil stocks remain risky after a strong rally on the back of soaring energy prices amid strong demand and geological concerns.

Q4 2021, annual results

Cenovus Energy shares have a five-year monthly beta of 3.65, making them highly volatile relative to the broader stock market. CVE stock earnings were negative in fiscal 2020, but turned positive in fiscal 2021.

In Q4 2021, Normalized EPS of -$0.20 was a shortfall of $0.59, GAAP EPS of -$0.17 was a shortfall of $0.52 and Revenue was 9.68 billion was also a shortfall of $1.39 billion.

In the fourth quarter of 2021, there was a significant year-over-year increase in production and throughput. Oil and NGLs (bbl/d) of 678,300 increased by 67%, conventional natural gas (MMcf/d) increased by 139%, total upstream production increased by 77% and total downstream throughput increased by 178%.

Total revenue was just over C$13.7 billion, cash flow from operating activities was C$2.2 billion and a net loss of C$408 million was reported, compared to a net profit of 551 million Canadian dollars in the third quarter.

The 2021 results were the first year for a combined company following the acquisition of Husky Energy. Total upstream production increased 68% to 791,500 boe/d, and total downstream throughput increased 173%.

Total revenue was approximately C$46.4 billion in 2021 and total operating margin was nearly C$9.4 billion, which is higher than revenue of C$13.5 billion and to a total operating margin of C$921 million in 2020.

Total capital expenditures for the year were approximately C$2.6 billion, well above fiscal 2020, and net income for 2021 was C$587 million, compared to a loss of 2.4 billion Canadian dollars the previous year.

Fundamentals – Risks

In fiscal 2021, Cenovus Energy doubled its quarterly dividend and launched a stock buyback program. At the end of the fourth quarter of 2021, net debt was less than C$9.6 billion, a reduction of more than C$1.4 billion from the end of the third quarter, which strengthened the balance sheet . The D/E ratio for the last quarter of 0.65 is nevertheless high.

Further monitoring of the operating margin and net margin is necessary, because in particular the net margin of 1.2% for the financial year 2021 is very low. Free cash flow generation of C$3.41 billion in fiscal 2021, a growth of 734.01%, is also very positive, but the company has a volatile free cash flow trend oscillating between positive and negative values.

Evaluation

CVE stock is relatively overvalued based on its P/E ratio (69.5x) compared to the US oil and gas industry average (17.1x), relatively attractive based on its P/E ratio B (1.7x) compared to the industry average US Oil & Gas (2.1x) and relatively expensive based on its PEG ratio (1.2x).

The Taking of Wall Street

Cenovus Energy has a strong buy consensus based on 12 buys. Cenovus Energy’s average price target of $18.45 represents 16.2% upside potential.

Conclusion

High oil prices helped Cenovus Energy turn profitable in fiscal 2021. This trend carries several risks and may not be sustainable when the net margin is slightly positive.

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Felix J. Dixon