Cenovus Energy Inc.

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.

To weather the current pandemic, the company has suspended its near-term dividend distribution program in order to support the cash flow of the company. Further, the company took some prudent action of lowering the FY20 capital spending by CAD 600 million. The company is targeting to reduce G&A costs by CAD 50 million and operating costs by CAD 100 million.

Q1FY20 Financial Highlights: CVE declared its quarterly results, wherein the company reported revenue of CAD 3,968 million, as compared to CAD 5,004 million in pcp. The decline was primarily attributable to lower revenue from all the segment due to a lower price realization on account of falling crude oil and natural gas prices due to a shrink in demand. The quarter was marked by a lower expense on purchased products, decrease in loss on risk management and lower finance costs while a surge in transportation and blending and higher depreciation, depletion & amortization remained as a drag. The company reported a net loss of CAD 1,797 million, as compared to a profit of CAD 110 million in the previous corresponding quarter. During the quarter, the company made a total capital investment of CAD 304 million, where the majority of the funds was invested in the oil sands segment and refining and marketing segment.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Valuation Methodology: EV/ Sales Based Relative Valuation (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of CVE Corrected ~46% so far this year, due to turmoil in international prices on account of lower demand scenario. Oil-producing companies across the North American markets witnessed tremendous jolt due to lower demand from industrial and manufacturing activities. The group is focusing on preserving liquidity and reduced its capital spending for FY20. The group is also focusing on cost efficiencies and targeting to reduce its operating expenses as well. We believe that demand for oil to witness a gradual recovery in the near term as easing lockdown restrictions are likely to result in higher industrial and manufacturing activities. Also, easing in travel restrictions would further provide support to the oil demand. The stock witnessed a sharp pullback rally in the recent past and appreciated ~38% in the last one month, followed by a sharp rebound in international crude oil prices. We have valued the stock using EV/Sales based relative valuation method and have arrived at a target upside offering double-digit (in percentage terms). For the said purposes, we have considered peers like Devon Energy Corp (NYSE: DVN), Imperial Oil Ltd (TSX: IMO) and Suncor Energy Corp (TSX: SU) etc. Hence, we recommend a ‘Buy’ rating on the stock at the current market price of CAD 7.05 on June 5, 2020.

CVE Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Whitecap Resources Inc.

Whitecap Resources Inc. Whitecap Resources (TSX: WCP) is a Canada based company which operates in the exploration and production of oil and natural gas. The Company derives majority (~77%) of its revenue from crude oil segment, while NGLs and Natural gas contribute ~7% and ~16% to the top line.

The Group paid a monthly dividend of CAD 0.01425 per common share. Meanwhile, total dividend payment for the first quarter was higher at CAD 34.91 million, against CAD 33.46 million in the previous corresponding quarter.

Q1FY20 Financial Highlights: WCP declared its quarterly results and posted total revenue and other income of CAD 430.40 million, significantly higher than CAD 184.22 million in Q1FY19. The increase was primarily attributed to a net gain on commodity contracts amounting CAD 169.17 million, as compared to a loss of CAD 111.36 million in pcp while lower income from petroleum and natural gas remained a drag. The quarter was marked by higher production of 73,452 boe/day, against 70,666 boe/day in pcp. Average realized price, on a combined basis, took a jolt and stood significantly lower at CAD 39.54/boe versus CAD 53.97/boe in the previous corresponding quarter. The quarter witnessed a considerable rise in the stock-based compensation expense along with interest and financing, and depletion, depreciation & amortization. WCP posted an impairment expense of CAD 2,924 million, which dented the bottom line. Net loss & other comprehensive loss widened to CAD 2,111.47 million, from CAD 52.56 million due to the above factor.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Valuation Methodology: Price to Cash Flow Based Relative Valuation (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of WCP tumbled ~51% year to date, as investors dumped the stock following a stiff correction within the Crude oil and natural gas prices, due to a temporary halt in the industrial and manufacturing operations on account of COVID 19 pandemic. To weather the challenging environment, the group reduced its capital expenditure by 44% and expect it to be in the range of CAD 200 million to CAD 210 million. The company has reduced its dividend from CAD 0.0285 to CAD 0.01425. We believe, the above measures are likely to help the company in preserving the liquidity and better allocation of capital. The group is also focusing on cost reduction measures and targeting a cost savings of CAD 42 million in operating expenses. The group’s G&A costs per boe is the lowest in the sector when compared to oil-weighted peers. Further, an expected improvement in the oil demand would benefit the company in the near term. At the current price, the stock is offering a lucrative dividend yield of 6.4%, which is attractive amidst the low interest rate environment. At the last traded price, the stock was trading above its 20-days and 75-days simple moving average of CAD 2.03 and CAD 1.99, respectively, indicating a medium-term bullish trend. We have valued the stock using Price to Cash flow based relative valuation method and have arrived at a target upside offering double-digit (in percentage terms). For the said purposes, we have considered Crescent Point Energy Corp (TSX: CPG), ARC Resources Ltd (TSX: ARX) and TORC Oil & Gas Ltd (TSX: TOG) etc. as a peer group. Hence, we recommend a ‘Buy’ rating on the stock at the current market price of CAD 2.69 on June 5, 2020.

WCP Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

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