Cenovus Energy (CVE, Financial) is an integrated oil company with assets at Foster Creek, Christina Lake, and Narrows Lake; the Athabasca natural gas assets; and projects in the early stages of development, such as Grand Rapids and Telephone Lake. The company has been among the more resilient companies in terms of stock downside in the recent carnage in oil and gas stocks. This article looks at the key reasons for considering exposure to Cenovus Energy at current levels.
The first reason to be bullish on Cenovus Energy is the company’s valuations. The stock is currently trading at an EV/EBITDA valuation of 4.8 and a price to sales (trailing twelve month) ratio of 0.89. Therefore, the valuations are very attractive, and the stock has significant upside potential when oil prices recover.
The second reason to consider Cenovus Energy at current levels is the company’s dividend. As of 2014, the company had a dividend payout of $0.93 per share or a dividend yield of 5% considering the current stock price of $20.75. The healthy dividend payout will sustain in 2015 with the company committing to keep the dividends stable in their guidance for 2015.
The third reason to consider Cenovus Energy is the company’s prudent financial plan for 2015. The company expects to incur capital expenditure of Canadian dollar 2.5 to 2.7 billion in 2015. However, the company intends to fund the capital expenditure and dividends for 2015 through internal cash and cash flows in 2015. This will keep the company’s debt in check in difficult times.
The fourth reason to consider Cenovus Energy is the company’s high financial flexibility. The company expects 2015 cash to be $700 to $800 million. Further, the company has an undrawn credit facility of $3 billion and this is sufficient to fund the company’s capital expenditure beyond 2015.
The fifth reason to consider Cenovus Energy is the company’s attractive assets. As of 2013, Cenovus Energy had contingent resources of 9.8 billion barrels of oil. Over the next 3-5 years, the company’s contingent resources will translate into strong proved reserves and trigger production upside when oil prices recover.
The final reason to be bullish on Cenovus Energy is the company’s recent regulatory approval for Telephone Lake project. The approval is for 90,000 barrels per day project and is likely to trigger strong production upside in the coming years. The development of the project will keep the stock sentiment positive.
Considering these important factors, Cenovus Energy is certainly an attractive stock to consider. I must mention here that investors should not expect the stock to surge higher in the next 6-12 months. Instead, the investment approach should be for the long term and I believe that considering exposure to the stock with a time horizon of 3-5 years can translate into strong portfolio returns.
At current levels, the stock looks good for gradual accumulation. With oil prices unlikely to surge in 2015, the year can be used to gradually accumulate this long-term outperformer stock.
