Cenovus Energy Inc. CVE is well poised to grow on the back of prospective oil sands projects in Alberta and growing capital efficiency.
The Calgary, Canada-based integrated energy company — with a market cap of around $10 billion — has an expected earnings growth rate of 6% for the next five years. For second-quarter 2019, its earnings per share are projected at 21 cents, indicating a significant turnaround from the year-ago reported loss of 19 cents. This estimate remained unchanged over the past 30 days.
Let’s delve deeper to find out why this Zacks Rank #3 (Hold) stock is worth retaining at the moment.
A Look at the Positives
Growth Projects: Cenovus Energy has operations in the prospective oil sands development in Alberta, where it has been employing a specialized technique for drilling and pumping crude out of the surface. The company is presently operating Christina Lake and Foster Creek oil sands projects, and gained regulatory approvals for additional developments like Narrows Lake and Telephone Lake, which will further boost crude output. In particular, its Christina Lake oil sands project, which has seen sustainable reduction in finding and development costs, is expected to improve long-term cash flows.
Efficiency: For 2019, Cenovus Energy has reduced capital expenditure projection by 4% to the range of $1.2-$1.4 billion. This is mainly due to efficiency improvements at the company’s oil sands operations and curtailed development plans for the Deep Basin as a result of the current commodity price environment. In spite of the reduced capex, the company expects higher total oil sands production.
Management: Management has also been working diligently. It has not been shy of divesting assets, particularly those that do not fit into the company’s long-term growth plan. As part of this initiative, Cenovus Energy divested the legacy conventional business on Jan 5, 2018 and completed sale of the Cenovus Pipestone Partnership — a wholly-owned subsidiary — on Sep 6, 2018, thereby freeing up capital to concentrate on high-grade prospects in the long term. Through 2018, it received proceeds of C$1.1 billion from non-core asset divestments, reflecting that the company is focused on streamlining its portfolio, thereby impairing debt burden and increasing shareholder value.
Clearly, investors are noticing the company’s true potential. This is evident from Cenovus Energy’s increase of 26.1% year to date compared with 13% collective gain of the industry it belongs to and 14.1% rise of the S&P 500 Index.
What’s Deterring the Stock?
There are a few factors that are holding back the stock from reaching its true potential.
The acquisition of Foster Creek and Christina Lake properties from ConocoPhillips nearly doubled Cenovus Energy’s debt burden in early 2017. Currently, the company has cash and cash equivalents of only C$244 million, and a total long-term debt of C$7,715 million, reflecting balance sheet weakness. This can affect its financial flexibility.
The company’s free cash flow plunged 44.6% and 79.5%, respectively, in first-quarter 2019 and fourth-quarter 2018. Free cash flow in the first quarter of 2019 came in at only $87 million. This reflects growing weakness in the company’s operations, which can be attributed to challenges in the Canadian commodity price environment.
To Sum Up
Despite riding on significant growth prospects, balance sheet weakness and challenges in the Canadian commodity price environment are concerns for the company. Nevertheless, we believe that systematic and strategic plan of action will drive its long-term growth.
Some better-ranked players in the energy space are Montage Resources Corporation MR, Approach Resources Inc. AREX and Earthstone Energy, Inc. ESTE. While Montage Resources sports a Zacks Rank #1 (Strong Buy), Approach Resources and Earthstone Energy hold a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Montage Resources’ sales growth is projected at 27.6% through 2019.
Approach Resources surpassed earnings estimates in three of the trailing four quarters, with the average positive surprise being 12.7%.
Earthstone Energy’ sales growth is projected at 15% through 2019.
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