Cenovus Energy: Can Oil Prices Sustain?

Cenovus Energy (CVE) engages in gas and oil provisions. 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 Basin, Refining and Marketing, and Corporate and Eliminations.

The Oil sands segment includes the development and production of bitumen in northeast Alberta including Foster Creek, Christina Lake, and Narrows Lake, as well as projects in the early stages of development.

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

The Refining and Marketing segment provides transportation and selling of crude oil, natural gas, and NGLS.

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

Shares of Cenovus Energy have a one-year performance of approximately 160% and have increased nearly 26% in 2022. I am neutral on CVE stock.

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

Oil stocks remain risky after a strong rally due to energy prices soaring amid strong demand and geological concerns.

Q4 2021, Full-Year Results

Shares of Cenovus Energy have a five-year monthly Beta of 3.65, which makes them highly volatile compared to the broader stock market. CVE stock earnings were negative in FY 2020 but turned positive in FY 2021.

In Q4 2021, normalized EPS of -$0.20 was a miss by $0.59, GAAP EPS of -$0.17 was a miss by $0.52, and revenue of $9.68 billion was also a miss by $1.39 billion.

In Q4 2021, there was a significant increase in production and throughput on a year-over-year basis. Oil and NGLs (bbls/d) of 678,300 increased 67%, conventional natural gas (MMcf/d) increased 139%, total upstream production increased 77%, and total downstream throughput increased 178%.

Total revenues were slightly over C$13.7 billion, cash from operating activities was C$2.2 billion and a net loss of C$408 million was reported compared with third-quarter net earnings of C$551 million.

Full-year 2021 results were the first year of 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 revenues were about C$46.4 billion in 2021 and the total operating margin was almost C$9.4 billion, higher than revenues of C$13.5 billion and total operating margin of C$921 million in 2020.

Total capital expenditures for the year were approximately C$2.6 billion much higher than FY 2020, and net earnings for 2021 were C$587 million compared with a loss of C$2.4 billion the previous year.

Fundamentals – Risks

In FY 2021 Cenovus Energy doubled its quarterly dividend and commenced a share buyback program. At the end of Q4 2021, net debt was below C$9.6 billion, a reduction of more than C$1.4 billion from the end of the third quarter which has strengthened the balance sheet. The latest quarter D/E ratio of 0.65 is nevertheless high.

Further monitoring of the operating margin and net margin is required as especially the net margin of 1.2% for FY 2021 is very weak. Free cash flow generation of C$3.41 billion in FY 2021 representing a growth of 734.01% is very positive too, but the firm has a volatile free cash flow trend oscillating between positive and negative values.

Valuation

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

Wall Street’s Take

Cenovus Energy has a Strong Buy consensus based on 12 Buys. The average Cenovus Energy price target of $18.45 represents 16.2% upside potential.

Conclusion

High oil prices have helped Cenovus Energy turn to profitability in FY 2021. This trend has several risks and may not be sustainable when at the same time net margin is marginally positive.

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