Daily Stock Watch: Cenovus Energy (CVE) Share Price Slips

By Kirsteen Mackay


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Canadian oil sands stock Cenovus Energy is largely affected by the WTI oil price.  Does the global energy crisis mean CVE stock is a buy?

Is Cenovus Stock a Buy?

In the first six months of 2022, CVE stock soared. Since then, it has witnessed a volatile trend downwards. Bullish investors in the stock believe the global energy crisis will see this stock come good in the end. But shareholders can expect volatility to continue. 

What Does Cenovus Energy Do?

Cenovus Energy Ltd (NYSE: CVE) operates as an oil and gas company. The company focuses on the production of integrated oils.

Cenovus began independent operations on December 1, 2009, when Encana Corporation split into two distinct companies: an oil company (Cenovus) and a natural gas company (Encana).

Many of Cenovus' original assets were from the two Canadian oil and natural gas companies that merged to form Encana in 2002 - PanCanadian Energy Corp. and Alberta Energy Company. Through these entities, CVE can trace its roots back to the 1880s when the Government of Canada commissioned Canadian Pacific Railway (CPR) to build a transcontinental railroad.

Today, CVE operates oil sands assets in Northern Alberta, which are the cornerstone of its Upstream production business. The company uses a drilling method called steam-assisted gravity drainage – or SAGD for short. Here its operations include three producing oil sands projects in Alberta: Christina Lake, Foster Creek and Sunrise, as well as thermal and heavy oil operations at Lloydminster in Saskatchewan. 

Cenovus Energy serves clients in Canada. 

Earlier this year, Cenovus bought BP's stake in its Sunrise oil sands project in northern Alberta, followed by BP's 50% stake in the Toledo, Ohio refinery for $300m in cash. Additionally, the parties signed a multi-year product supply agreement at Toledo.

Alex Pourbaix, Cenovus President & CEO, said:

Fully owning the Toledo Refinery provides a unique opportunity to further integrate our heavy oil production and refining capabilities,

Operating the refinery will open up additional synergies and capital efficiency opportunities, including connectivity with our nearby Lima Refinery. This transaction solidifies our refining footprint in the U.S. Midwest and increases our ability to capture margin throughout the value chain.

Unfortunately, the BP Toledo refinery experienced a fire last week. Insurance will likely cover the damage, but it may delay CVE's purchase closing date.

How Does Cenovus Energy Make Money?

Cenovus Energy makes money selling the oil it produces. CVE produces oil from three sources: Oil Sands, Conventional and Offshore. The oil sands are by far its most significant production source. In Q2 of fiscal 2022, CVE saw a quarterly adjusted funds flow of $3.1bn. 

The company has pledged to return money to shareholders via share buybacks when CVE's net debt is below $9bn. In Q2, CVE returned over $1bn via buybacks and reduced net debt to $7.5bn.

CVE Stock Financials

CVE's market cap has slipped from $45bn in July to $30bn today. Does that mean it's time to buy the dip?

Over the past year, Cenovus Energy Inc (CVE) has traded between $9.17 and $24.91. Today it trades at around $15.45 (CA$21).

Year-to-date, CVE stock is up by 22.33%, while the S&P 500 is down by -23% over the same period.

FactSet analysts have a consensus Buy rating on CVE stock with a target share price of $24.61 (CA$33.43).

CVE stock has a price-to-earnings ratio (P/E) of 10 and its price-to-book-value (P/BV) is 1.6. CVE stock comes with a dividend yield of 2%. 

A stock with a beta higher than 1.0 is expected to be more volatile than the S&P 500. CVE stock has a beta of 2.3, accurately reflecting its volatile nature.

RBC Capital Markets Rates CVE Stock a Buy

Earlier this month, RBC Capital Markets maintained an Outperform rating on CVE stock with a $32 share price target. The investment bank believes Cenovus Energy has a capable leadership team, strong balance sheet and capital discipline.

It also deems improved shareholder returns via dividends and buybacks a strong possibility going forward.

Cenovus Energy Growth Potential

The company hopes to generate free cash flow and continue to reduce debt during the second half of 2022. Cenovus also aims to achieve its $4bn net debt target by the end of this year.

CVE Stock Risks

  • The suppressed oil price will likely weigh on the CVE share price in the short term.

  • Inflation impacts the company's input costs, and it expects its capital investment costs next year will be higher than previously thought. 

  • CVE has grown through M&A; another acquisition could also delay shareholder returns.

  • Competitors are operating in the area, some of which may be ahead of CVE in operational aptitude. 

  • The recent BP Toledo refinery fire could result in downtime that impacts future cash flow from the deal for CVE. In turn, this could lead to increased capital expenditure, potentially delaying shareholder returns.

How Much CVE Stock Does the CEO And Other Management Own?

Not much is the short answer. Insiders own around 0.1% of CVE stock, while institutions own 66%. 

  • Alex Pourbaix, President and CEO of Cenovus Energy, owns a 0.06% stake in CVE.

  • Keith A. J. MacPhail, Chairman for Cenovus Energy, has a 0.04% stake.

  • Jonathan M. McKenzie, COO and Executive VP, has a 0.02% stake.

  • Via CK Hutchison Holdings, Hong Kong billionaire business magnate Li Ka-Shing owns a 16.4% stake in Cenovus from his prior ownership of Husky Energy.

  • The Li family Trust also owns a 12% stake.

Is CVE Stock a Good Investment?

The success of the CVE stock price is primarily linked to the WTI oil price and company news flow. When the CVE share price was soaring in the first half of the year, the price of oil was elevated over $100 a barrel and briefly spiked above $120. WTI has now come down to around $77.

There are two schools of thought as to how the oil price will land during the winter. A global slowdown and countries like China tapping their reserves could lessen demand and suppress the price for longer, as could mild weather.

Another factor longer-term is the global food crisis exacerbated by drought, which could suppress oil demand if factories are forced to close.

Others believe it's inevitable that demand will climb as the Russia/Ukraine war rages on and cold winters require more oil and gas.

Furthermore, the US released excess oil from its strategic petroleum reserve (SPR), which may at some point need to be replaced, although this point is also debated.

The oil price is also driven by political decisions and therefore remains largely unpredictable.

If you enjoyed our Cenovus Energy coverage, you may be interested in our recent Daily Stock Watch articles.

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This article does not provide any financial advice and is not a recommendation to deal in any securities or product. Investments may fall in value and an investor may lose some or all of their investment. Past performance is not an indicator of future performance.

Kirsteen Mackay does not hold any position in the stock(s) and/or financial instrument(s) mentioned in the above article.

Kirsteen Mackay has not been paid to produce this piece by the company or companies mentioned above.

Digitonic Ltd, the owner of ValueTheMarkets.com, does not hold a position or positions in the stock(s) and/or financial instrument(s) mentioned in the above article.

Digitonic Ltd, the owner of ValueTheMarkets.com, has not been paid for the production of this piece by the company or companies mentioned above.

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