Cenovus Energy Inc (TSX: CVE), is a Canada-based integrated oil and natural gas company. Its operations include oil sands projects in northern Alberta and oil production in Alberta and British Columbia.

Key Highlights

• Lower crude utilization rate: The crude utilization rate in the United States Manufacturing segment was 72%, with crude throughput of 361,600 bbls/d, down from 89% and 445,800 bbls/d in the third quarter. The fourth-quarter differential was mostly due to lower throughput at the Lima Refinery because of a planned major turnaround.

• Lower margin profile v/s Industry: In Q3 FY21, the company failed on maintaining its pace and witnessed lower performance under the operating margin matrix, comprising of all gross margin, EBITDA margin, operating margin, and net margin, which exhibits the extreme pressure on the company.

  Source: REFINITIV, Analysis by Kalkine Group 

• Stretched valuations: CVE shares are available at a Price/ Cash Flow multiple of 4.2x compared to the industry (Oil & Gas) median of 3.4x and on NTM Price/ Earnings multiple it's trading at 8.6x against an industry median of 7.9x. This implies that the shares are overvalued against the industry. Higher valuations against an industry draw a caution line.

Source: REFINITIV, Analysis by Kalkine Group

Valuation Methodology (Illustrative): Price to Cash Flow

Analysis by Kalkine Group

Stock recommendation

The company delivered record oil sands production in Q4 2021, contributing to the total upstream output of more than 825,000 barrels of oil equivalent per day (BOE/d) and almost 792,000 BOE/d for the full year. Furthermore, it generated cash from operating activities of CAD 2.2 billion and adjusted funds flow of CAD 1.9 billion with free funds flow of CAD 1.1 billion in the reported Q4 2021, which is a key positive.

However, its operating margin profile is on the lower end of the industry, indicating that it is under pressure. The stock has generated handsome returns on 6 months of 89.9% and yearly basis at 138.24% respectively, correlated with the rally in the crude prices. We believe the price of the crude to get softened as Washington and Tehran have sparked some optimism that the two sides are inching toward reviving a nuclear deal that would lead to a resumption of official crude exports from the Persian Gulf producer. As a result, we recommend a “Watch” rating on the stock at the closing price of CAD 18.30, as on February 8, 2022.

1-Year Price Chart (as on February 8, 2022). Source: REFINITIV, Analysis by Kalkine Group

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

Vermilion Energy Inc (TSX: VET) is an international oil and gas producing company, which is engaged in the full-cycle exploration and production programs that focus on the acquisition, exploration, development, and optimization of producing properties in North America, Europe, and Australia.

Key Highlights:

• Increase in net losses: During Q3FY21, the company reported a net loss of CAD 203.5 million, which is higher than the net loss of CAD 139.9 million in Q3FY20. The company witnessed an increase in input costs like higher purchased commodities expense, increase in the operating expense, higher transportation expense, etc. Additionally, the group reported a higher loss on derivative instruments of CAD 351.9 million, as compared to the loss of CAD 35.4 million in PCP.

• Weak Liquidity ratio: At the end of Q3FY21, the company reported its quick ratio and a current ratio of 0.49x for the quarter ending September 2021, as compared to the industry median of 0.83x. A lower ratio denotes a weak liquidity profile and remains a key concern.

• Higher D/E ratio: The company reported a higher D/E ratio of 1.05x in Q3FY21, as compared to the industry median of 0.66x. A higher debt to equity ratio denotes lower financial flexibility. Additionally, the investors of VET are prone to higher risk as to its long-term debt to total capital ratio stood at 51.3% in Q3FY21, as compared to the industry median of 28.6%.

Stock Recommendation:

Despite a higher top-line in Q3FY21 (CAD 524.6 million v/s CAD 274.7 million in PCP) coming from Petroleum & Natural Gas, the company failed to retain the momentum and reported a higher net loss, and continuation of the above trend would remain a key concern for the company. Notably, the stock of VET is available at a higher valuation of Price/Earnings multiples of 3.7x on a TTM basis, as compared to the industry (Energy) mean of 3.0x. Hence, considering the aforesaid facts, we give a ‘Watch’ stance on the stock of VET at the closing price of CAD 19.45 on February 08, 2022.

1-Year Price Chart (as on February 8, 2022). Source: REFINITIV, Analysis by Kalkine Group

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

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.