tiprankstipranks
Cenovus Energy is Firing on All Cylinders
Stock Analysis & Ideas

Cenovus Energy is Firing on All Cylinders

Like Suncor (SU) earlier this week, Cenovus Energy (CVE) used its quarterly earnings call as an opportunity to let investors know it is taking advantage of rising oil prices to raise its dividend payout and to authorize additional share repurchases.

Thanks to this renewed commitment to returning capital to shareholders amidst higher oil prices and continued impressive operational results, I am bullish on shares of CVE. (See Analysts’ Top Stocks on TipRanks)

The company announced a quarterly profit of C$551 million after posting a loss of C$194 million during the same period last year. Cenovus’ total output increased by over 70% compared to the same period last year, and its downstream throughput increased by almost 300%. 

Cenovus’ breakeven price per barrel of WTI is just under $36, so current prices in the $80 range are a boon for the company. Even better, Cenovus is unhedged, meaning it will benefit even more from higher oil prices than peers who have hedges in place. Any increase in the price of oil will directly add to Cenovus’ free cash flow.  

Capital Allocation & Returns to Shareholders

Cenovus announced it is doubling its quarterly dividend payout to C$0.035. Even after doubling the dividend, this isn’t an income play per se as the new dividend yield is still under 1%.

However, it is an old investing adage that the safest dividend is the one that was just raised. Furthermore, by raising the dividend in a conservative manner, management leaves itself with the flexibility to raise the dividend again going forward if oil prices continue to hold (or rise), making Cenovus a compelling potential dividend growth story. 

Additionally, Cenovus management announced that it will be repurchasing up to 146.5 million shares, or about 10% of its public free float. This will also return capital to shareholders as it will reduce the number of shares on the market and increase earnings per share. Share buybacks are also a sign that management believes the company is undervalued and can help to support the stock price.

With over 2 billion shares outstanding, reducing the share count seems to be an accretive use of cash moving forward. It is notable that Cenovus plans on doing this with cash flow generated from operations, not by issuing debt. 

Cenovus is working on reducing its debt, with CEO Alex Pourbaix indicating that at current energy prices, Cenovus should be able to meet its target of C$8 billion of debt by the middle of 2022. Pourbaix also stated that as debt comes down to this target ratio, “you should expect to see a more balanced approach to free funds application between further de-leveraging and shareholder returns.”

Analyst Sentiment 

The analyst community views Cenovus as a Strong Buy. Ten analysts covering the stock currently have a Buy rating on it, while one assigned a Hold rating. The average Cenovus price target of C$17.45 implies 13% upside. 

Takeaway

With the company wisely using the increased cash flow from higher oil prices to implement share buybacks, an increased dividend with more raises likely in the coming quarters, and further debt reduction, it’s easy to like Cenovus.

Disclosure: At the time of publication, Michael Byrne did not own shares of any stocks mentioned.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates, and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices or performance.

Trending

Name
Price
Price Change
S&P 500
Dow Jones
Nasdaq 100
Bitcoin

Popular Articles