Among oil and gas players in Canada, Cenovus Energy (CVE, Financial) is my stock pick on a medium to long-term investment horizon.
Big returns from the energy sector are not likely any time soon. However, oversold names can provide stellar short-term returns, and 2016 has witnessed several energy stocks surging higher. The portfolio allocation to the energy sector should remain moderate as uncertainties still exist from supply-demand perspective and also from the perspective of economic growth.
Coming to Cenovus Energy, the first reason to be bullish on the company is strong financial health. In challenging times, the first priority is survival, and Cenovus Energy is well positioned to navigate the challenges in the energy sector even if oil prices remain depressed in the next 12 to 18 months. Cenovus Energy still commands ratings of BBB and Ba2 from Standard & Poor's and Moody’s with a “Stable” outlook.
Looking into the numbers, Cenovus Energy had cash and equivalents of $4.1 billion as of December 2015 coupled with $4 billion in undrawn credit facility. Total liquidity buffer of $8.1 billion ensures that the company’s balance sheet health remains robust.
With net debt to capitalization of 16% and net debt to EBITDA of 1.2, there are no concerns from leverage perspective. To add to the balance sheet positives, Cenovus Energy has no debt maturity until fourth quarter 2019, and this ensures no immediate debt refinancing pressure.
With these key positives, the company’s credit rating should remain at the same level with a “Stable” outlook through 2016. The bear case scenario will arise if there is a global recession, and there is renewed downturn in oil prices. However, I expect sluggish global growth, not recession. If oil-producing countries agree on a much talked about production freeze, oil can potentially trend higher, and this will take Cenovus Energy higher as well.
While the liquidity and balance sheet factor ensures that the company’s credit health remains robust, the following factors make Cenovus Energy worth considering for the long term:
- First, Cenovus Energy’s cost reduction initiatives and target are attractive with the company expecting growth capital of $2 to $3 per barrel and sustaining capital of $9 to $11 per barrel. With full cycle capital of $11 to $14 per barrel, Cenovus Energy is certainly among the stocks that will deliver robust EBITDA margin once oil trends higher and sustains at higher levels.
- Second, Cenovus Energy has proved and probable reserves of 3.8bboe along with contingent resources of 9.3bbls. This provides the company with robust long-term inventory and the flexibility to scale up investments and production significantly when oil prices trend higher.
- Third, Cenovus Energy has discovered BIIP of 93bbls and undiscovered BIIP potential of 50bbls. While it’s too early to talk about the potential upside from these resources, there are reasons to be optimistic for the long term.
Considering these factors, Cenovus Energy is worth holding for the long term, and the stock can be considered for fresh exposure at current levels. However, investors still need to be cautious on exposure to the broad energy sector; limited exposure to a few quality stocks should be considered. Cenovus Energy is certainly among the few stocks worth buying.
Disclosure: No positions in the stock.
