Turmoil in Oil Prices Resulted in an Attractive Valuation: Cenovus Energy Inc. (TSX: CVE)is a Canada-based integrated energy company, engaged in producing, developing and marketing oil, natural gas and natural gas liquids

Recent Operational Highlights:

• The business successfully deleveraged its balance sheet by repaying US $1.8 billion of unsecured notes, reflecting a reduction of Net Debt to $6.5 billion.

• Total Production from operations was reported at 451,680BOE per day, as compared to 483,458BOE per day, reflecting a decline of 7% on y-o-y basis.

• The company has increased its quarterly dividend by 25% to CAD 0.0625 per share. Dividend paid to common shareholders stood at CAD 260 million, up from CAD 245 million in the previous corresponding period.

FY19 Financial Highlights: For the period ended December 31, 2019, CVE announced its full-year results, wherein the business reported gross sales of CAD 21,353 million, almost flat when compared with the prior year. The company generated free funds flow of CAD 2,548 million, up from CAD 311 million in FY18. During FY19, the company made capex of CAD 1,189 million, as compared with CAD 1,704 million in FY18.  

FY19 Income Statement Highlights (Source: Company Reports)

Valuation Methodology: P/CF Based Relative Valuation

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock Recommendation: The stock of CVE is quoting at CAD 3.46, with a market capitalization of CAD 4.25 Billion. The stock made a 52-week high and low of CAD 14.31 and CAD 2.06, and currently, the stock is trading near the lower band of its 52-week trading range. Owing to the recent correction in the crude oil prices, CVE stock plunged ~56.20% and ~69.65% in the last one month and six months, respectively. The crude oil prices are taking a hit majorly due to oversupply across the global markets on account of lower demand due to COVID 19 pandemic and price war among Saudi Arabia and Russia. Notably, oil prices bounced back sharply after US President Donald Trump indicated a truce between Russia and Saudi Arabia on price war. This could lead to the reduction in oil production and support prices in the short-term. The company is also focusing on cost reduction within the upstream asset segment that is likely to cushion its bottom-line. CVE stock looks undervalued considering the sharp correction. Further, we expect oil prices to increase gradually which could support the recovery in CVE stock. We have valued the stock using P/CF based relative value methodology and took Imperial Oil (TSX: IMO) and Suncor Energy (TSX: SU) etc. as peers and arrived at an upside in lower double digit (in percentage terms). Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 3.46, up 3.28% as on April 03, 2020.

CVE One-Year Daily Price Chart (Source: Thomson Reuters)

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