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 positive cash from operation of CAD 1,597 million in H1FY21, as compared to cash used in operating activities of CAD 709 million in pcp. The above was primarily supported by strong bottom-line growth of CAD 444 million in H1FY21, as compared to a loss of CAD 2,032 million in pcp.
• Added revenues from Asia Pacific and Atlantic segments: The company started its operations within the Asia Pacific and Atlantic regions in the recent past, which reported additional offshore production of 57.8 MBOE/day and 15.2 MBOE/day, respectively. We believe the above is expected to add prospects to the upcoming performance.
• Elevated Commodity prices resulted in strong performance growth: Brent crude prices stood at USD 68.83/bbl in Q2FY21, significantly higher than USD 29.20/bbl in pcp. Natural gas prices, on the other hand, also stood higher at USD 2.83/thousand cubic feet (Mcf) in Q2FY21, as compared to USD 1.72/thousand cubic feet Mcf in pcp. As a result, revenue was recorded at CAD 19,727 million in H1FY21, higher than CAD 6,135 million in pcp.

Q2FY21 Financial Highlights:     

• CVE announced its quarterly result, wherein the company posted 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 765.9 MBOE/day, as compared to 465.4 MBOE/day coupled with elevated realization prices.
• 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), and higher Transportation and Blending expenses (CAD 1,796 million v/s CAD 646 million in pcp).
• The net earnings stood at CAD 224 million, as compared to a net loss of CAD 235 million in pcp.

Q2FY21 Income Statement Highlights (Source: Company Report)

Risks: Volatility within the crude oil prices would likely to dampen the company’s realization prices and subsequently, its revenue and cash flows.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

For FY21, the company expects its total Upstream production of 750 - 790 Mbbls/day, while its downstream throughput is expected in between 500 – 550 Mbbls/day. Capital expenditure for the upstream segment is expected in between CAD 1,320 to 1,510 million, while downstream capital expenditure is estimated in between CAD 900 - 1,100 million. 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, Canadian Natural Resources Ltd etc., for the comparison purpose. Considering the aforesaid facts, we recommend a 'Hold' rating on the stock at the closing price of CAD 11.15 on September 13, 2021

One-Year Technical Price Chart (as on September 13, 2021). Source: REFINITIV, Analysis by Kalkine Group 

Precision Drilling Corporation

Precision Drilling Corporation (TSX: PD) is a leader in North American oil and gas services which operates in contract drilling activities. The company has also expanded into the United States with the purchase of Grey Wolf.

Key Highlights:

• Consistent Debt reduction: The company has prudent capital management and has lowered its total debt since 2015. Moreover, the company does not have any debt maturity till 2024, which indicates retention of liquidity, which is a key positive. A constant reduction in borrowings has resulted in lower interest costs, which also supported the profitability.
• Improving Macros: Demand for oilfield services has improved in recent quarters, supported by higher commodity prices. As the industry is focusing on operational efficiencies and improving their cost center, the management believes that demand for asset upgradation would accelerate in the coming days. Moreover, the company is witnessing improved demand from the drilling automation processes, which provides predictable and repeatable results to its clients. The momentum is expected continue in the coming days considering the focus on higher operational efficiencies.
• Drilling and upcoming operation update: As of September 2021, the company provided an update on its drilling activities, wherein it would perform more than 40 drilling activities in the US and more than 50 drilling activities for the rest of FY21. Customer bookings were significantly higher than the previous corresponding period. OPEC members are focusing on increasing their drilling to meet higher production targets, which indicates improved prospects from the international segment. Moreover, the group is also discussing on increasing its tender activities in Kuwait and Saudi Arabia, which looks promising.

Q2FY21 Financial Highlights:

• PD announced its quarterly results, wherein the company posted revenue of CAD 201.359 million, grew 6.1% on y-o-y basis. The growth was mainly due to strong performance from Completion and Production Services.
• The company posted earnings before income taxes of CAD 28.944 million, decline from CAD 58.465 million in the previous corresponding period.
• The company’s net loss widened to CAD 75.912 million, from a net loss of CAD 48.867 million in pcp.

Q2FY21 Income Statement Highlights (Source: Company Report)

Risk: The company’s operations are interrelated to the drilling activities done by the energy-producing companies. Due to the continuation of the low commodity prices on account of COVID 19 pandemic, most of the energy producers postponed its capital investment, which subsequently impacted the order book of the company. Continuation of the above trend would dampen the company’s future performance. 

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

Apart from Drilling and C&P operations, the company also provides services like Oilfield Rentals, Camps & Catering, Directional businesses etc. The company also provides new-age services like Precision Alpha Technologies and expects improved demand prospects from the above. The company expects a stronger second half performance from the Canada geography while expects increased maintenance and completion work supported by higher commodity prices. We have valued the stock using P/CF-based relative valuation approach and arrived at a target price offering single-digit upside potential (in % terms). We have considered peers like Ensign Energy Services Inc, Patterson-UTI Energy Inc. etc. for the above purpose. Hence considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 45.02 on September 13, 2020.

One-Year Technical Price Chart (as on September 13, 2021). 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.