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Cenovus Energy: A Good Dividend Stock To Own

July 20, 2014 | About:
Faisal Humayun

Faisal Humayun

3 followers

Cenovus Energy (CVE) is an integrated oil company, which, together with its subsidiaries, develops, produces, and markets crude oil, natural gas, and natural gas liquids in Canada with refining operations in Illinois and Texas, the United States. Cenovus Energy currently offers a dividend yield of 3.1% and this article discusses why the company is a good dividend stock to own.

The company’s huge reserve base is one of the critical factors for being positive on the stock and believing that dividends will continue to increase. As of December 2013, Cenovus Energy had total reserves of 2,284mmboe and bitumen reserves of 1,846mmbbls. This translates into a reserve life of 24 years and implies that strong cash flows will continue for the company if oil & gas prices remain firm.

While high reserves and reserve life is a positive, looking at the conversion of reserves into revenue is also an important factor to access. Cenovus Energy’s oil sands production has increased from 44,423bbls per day in 2009 to 102,500bbls per day in 2013. The company has therefore been successful in converting reserves into robust production and cash flows. For 2013, the company’s total crude and natural gas liquids production was at 179,275bbls per day and natural gas production was at 529mmcf/day.

The total production level translated into revenue of $17.5 billion and an operating cash flow of $4.2 billion. A very important factor to discuss here from a dividend point of view is the company’s free cash flow. For 2013, the company had a net capital expenditure of $2.8 billion and this implies a free cash flow of $1.4 billion. Therefore, Cenovus Energy has a strong free cash flow to increase its dividends going forward.

Also, the company’s production is likely to increase over the next few years and this will translate into higher cash flows and increasing dividends. For 2014, the company has already provided a guidance of 190mmbls per day to 208mmble per day of oil production and this implies a production growth of 16% at the optimistic end of the guidance as compared to 2013.

With oil & natural gas prices remaining firm, I do believe that the company’s free cash flow will be strong in 2014. Even considering the long-term outlook, the company expects to increase production at a rate of 11% from 2014-2023. This is certainly strong growth and it implies that dividends will keep flowing and increasing.

In the last few years, Foster Creek oil sands production was the primary production growth driver. Going forward, the increase in production is likely to come from Christina Lake. Both these assets combined, have contingent resources of 2.5 billion barrels and the production growth is likely to continue with such rich assets.

Telephone Lake with 2.6 billion barrels of contingent resources, Steepbank & East McMurray with 2.9 billion barrels of contingent resource and Grand Rapids with 1.5 billion barrels of contingent resource, are the assets to watch out for over the next few years. The broad conclusion however is that the company’s rich asset base has the potential to keep the production growth going for long-term and cash flows will also increase accordingly.

For the company’s Telephone Lake asset, the regulatory approval is expected in the second half of 2014 and the company expects initial production capacity to be 90,000bbls per day with peak production from the asset at 300,000bbls per day.

For Grand Rapids, the company has received regulatory approvals in 1Q14 and the first phase of the project is likely to have a production capacity of 8000bbls per day to 10,000bbls per day. The peak production from the asset is likely to be 180,000bbls per day.

While both these projects are a part of the company long-term growth plans, the development in these rich assets will ensure that the stock keeps moving higher as the potential for future cash flow also increases.

From a financial point of view, the positive factor is that Cenovus Energy has a strong operating cash flow and a healthy balance sheet position. Strong financial flexibility will help the company fund the investments in the new assets. As of 1Q14, Cenovus Energy had a debt to capitalization of 36% and the company intends to keep the ratio in the range of 30% to 40%. The company’s debt to adjusted EBITDA as of 1Q14 was 1.4, which implies that the leverage is not high and the company can use debt to fund its growth.

In conclusion, Cenovus Energy has some excellent assets that can provide huge long-term cash inflows for the company. Even over the next few years, the company’s production is likely to grow at a strong pace along with growth in cash flow and dividends. The stock is an attractive buy at a current stock price of $31.1 and an EV/EBITDA of 7.9.

About the author:

Faisal Humayun
Senior Research Analyst with experience in the field of equity research, credit research, financial modelling and economic research

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