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:

• Improved Funds flows through discipline cost structure: The group’s top-tier assets which produce lowest cost structures backed up by strong balance sheet. Moreover, the group can withstand the commodity price volatility through a flexible planning process, which is a key positive. The group is focused on increasing its Free Funds Flow by focusing investments on sustaining capital expenditures. Notably, adjusted funds flow stood at CAD 1,141 million, as compared to a loss of CAD 154 million in pcp.

• Improved netback indicates strong recovery: Netback is termed as the gross profit earned per barrel, and a higher netback denotes improved performance. In Q1FY21, the group reported a surge in its netback backed by increased marketing efforts for natural gas and facility optimization, which is a key positive. In Q1FY21, netback was recorded at CAD 15.80/boe, significantly higher than CAD 5.32/boe in Q1FY20.                                                 

Source: Company Report 

Q1FY21 Financial Highlights:

• CVE announces its quarterly result, wherein the company posted its revenues of CAD 9,150 million, significantly higher than CAD 3,961 million in the previous corresponding period (pcp). The surge was aided by a higher production volume of 769,254 BOE/day, as compared to 482,594 BOE/day.
• The quarter was marked by an increase in Purchased Product expenses (CAD 4,094 million v/s CAD 2,058 million in pcp), higher Operating costs (CAD 1,134 million v/s CAD 554 million in pcp), partially offset by lower Transportation and Blending expenses (CAD 1,785 million v/s CAD 1,912 million in pcp).
• The group turned profitable and reported net earnings stood at CAD 220 million, as compared to a net loss of CAD 1,797 million in pcp.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: In case of any change in demand dynamics, coupled with an oversupply of crude oil, the business might witness a setback on account of lower realization.

Valuation Methodology (Illustrative): Price to CF based

Stock Recommendation:

For FY21, the group expects its annual upstream production in between 730,000 BOE/day to 780,000 BOE/ day, while total downstream throughput is estimated in between 500,000 barrels per day to 550,000 barrels per day. The group’s downstream segment provides diverse margin through the diluent loop and sells high-value Canadian products, coupled with an extensive midstream network, and storage assets support marketing activities, which are key positives. 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, Imperial Oil Ltd etc., for the purpose. Considering the aforesaid facts, we recommend a 'Hold' rating on the stock at the closing price of CAD 12.04 on June 23, 2021.

One-Year Technical Price Chart (as on June 23, 2021). Analysis by Kalkine Group

First Quantum Minerals Ltd.

First Quantum Minerals Ltd. (TSX: FM) is a diversified mining company engaged in the production of copper, nickel, gold, zinc, and acid, and related activities, including exploration and development.

Key Highlights:

• Surge in cash from operations: In Q1FY21, the group reported healthy cash from operations of USD 743 million compared to USD 473 million in Q1FY20. The increase was driven by a net income of USD 194 million, as compared to a loss of USD 95 million in pcp.
  

• Declining Net debt: The group’s financial position has improved over the years, as it has reported a constant reduction in its net debt. The company’s business is capital-intensive in nature. Hence, the company’s ability to repay its existing debt remains crucial. A decline in net debt depicts higher financial flexibility.
  

Source: Company Presentation

• Encouraging copper production: In Q1FY21, the group reported strong production from copper, primarily supported by strong momentum from Cobre Panama. Production of 82,042 tonnes, depicting an increase of 46% on y-o-y basis. Moreover, the company’s Zambia mine also reported a stable performance despite a heavy rainfall during the quarter, which subsequently supported the production. Notably, copper production stood at 205,064 tonnes, significantly higher than 195,285 tonnes in pcp.

Q1FY21 Financial Highlights:

• FM declared with its full-year result, wherein the group reported revenue of USD 1,678 million, higher than USD 1,182 million in Q1FY20. The increase was driven by higher income from both copper and gold segments.
• Gross profit surged to USD 540 million, from USD 147 million in the previous corresponding period. The increase was driven by higher revenue, partially offset by a higher cost of sales (USD 1,138 million v/s USD 1,035 million in Q1FY20).
• The period was marked by higher General and administrative costs, while lower Finance costs supported the profitability. Earnings before income taxes stood at USD 350 million, as compared to a loss of USD 145 million in pcp.
• The company reported a net profit of USD 194 million, as compared to a net loss of USD 95 million in the previous corresponding period (pcp).

Q1FY20 Income Statement Highlights (Source: Company Report)

Risk: A volatility in the commodity prices might affect the realization price, which would subsequently take a toll on the cash flows and margins of the company.

Valuation Methodology (Illustrative): Price to Earnings based

Stock Recommendation:

For FY21, the group expects its copper production within the range of 785 tonnes to 850 tonnes, while gold production is expected in between 280 ounces to 300 ounces. The group took a prudent strategy and hedged ~35% of its expected copper sales for the next 12 months, which would benefit in case of any adverse price volatility. We have valued the stock using the P/E-based relative valuation method and have arrived at a single-digit downside (in percentage terms). For the said purposes, we have considered peers like Teck Resources Ltd, Southern Copper Corp etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of FM at the last closing price of CAD 28.08 on June 23, 2021.

One-Year Technical Price Chart (as on June 23, 2021). 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.