Cenovus Energy Inc.

Cenovus Energy Inc. (TSX: CVE) is an integrated oil company which focuses on creating value through the development of its oil sands assets.

Key Highlights:

• Positive Cash from operations: The company reported encouraging cash flow from operating actives in the first half of FY21 at CAD 1,597 million, as compared to the cash used of CAD 709 million in H1FY20. The above was supported by a net profit of CAD 444 million in H1FY21, as compared to a net loss of CAD 2,032 million in pcp.
• FY21 Outlook: The company expects its annual upstream production in between 750.0 thousand BOE/ day to 790.0 thousand BOE/ day, while total downstream throughput is expected at 500.0 thousand barrels per day to 550.0 thousand barrels per day. In order to battle the sluggish economic scenario, the company expects to achieve CAD 400 million of corporate and operating synergies, while through its capital allocation synergies, the company expects to save CAD 600 million.

Q2FY21 Financial Highlights:

• CVE announces its quarterly result, wherein the company posted its revenues of CAD 10,577 million, jumped from CAD 2,174 million in the previous corresponding period (pcp). The surge was aided by a higher production volume of 767.6 MOE/day, as compared to 474.0 MOE/day.
• The quarter was marked by an increase in Purchased Product expenses (CAD 5,253 million v/s CAD 741 million in pcp), higher operating costs (CAD 1,144 million v/s CAD 435 million in pcp), partially offset by lower Transportation and Blending expenses (CAD 1,796 million v/s CAD 646 million in pcp).
• The group turned profitable and reported net earnings of CAD 224 million, as compared to a net loss of CAD 235 million in pcp.

Source: Company Report

Risks: Volatility in oil prices or change in demand dynamics would affect the group’s revenue and cash flow.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

The company reported its adjusted fund flow of CAD 2,958 million in H1FY21, as compared to negative flows of CAD 623 million a year ago. The company turned profitable from Q1FY21 onwards, which is a healthy sign and has boosted the company’s cash flows and fund flows since then. With the company’s focus on cost savings and capital preservation measures, we believe the company would be able to maintain its current liquidity. Meanwhile, the company reported a significant improvement in Net Debt to Adjusted EBITDA ratio to 2.8x at the end of Q2FY21, as compared to 11.9x in Q4FY20, which is encouraging. We have valued the stock using the Price to CF multiple based relative valuation method and have arrived at a target upside of single digit (In percentage terms) upside. We have taken peers like MEG Energy Corp, Suncor Energy Inc etc., for the purpose. Hence, we recommend a 'Hold' rating on the stock at the closing price of CAD 10.47 on August 11, 2021

One-Year Technical Price Chart (as on August 11, 2021). Source: Kalkine, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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