Cenovus Energy Inc.

Enhanced Financial Resilience and Strong Balance Sheet: Cenovus Energy Inc. (TSX: CVE) is an integrated oil company, focused on creating value through the development of its oil sands assets. As on 26 June 2020, the market capitalization of the company stood at CAD7.45 billion.

Quarterly Performance (For the Period Ended 31 March 2020): During the first quarter, the company delivered safe and reliable operations, demonstrating its ability to take swift and decisive steps to enhance its financial resilience. Cenovus had an operating margin shortfall of CAD589 million as compared with an operating margin of over CAD1.2 billion in the pcp. This decrease was mainly due to lower average realized oil prices and marketing operating margin shortfall. The quality of the company’s long-life oil sands reserves and its flexibility responded quickly to the changing external environment and positioned CVE with a strong balance sheet. Over the past two years, the company has diligently reduced its sustaining capital and operating costs, maintaining capital discipline. The company has a committed credit facility of CAD4.5 billion with no maturities until late 2022 and late 2023.

Quarterly Financial and Production Summary (Source: Company Reports)

Key Risks: The company is exposed to various risk factors including a change in global demand for refined products, a rise in prices, etc. The company is inherited with various other risks including credit risks, exposure to counterparties and partners, and economic and geopolitical tensions.

Growth Opportunities: The situation of the company is likely to improve with the recovery in the economic conditions. Cenovus is actively managing its production levels as market conditions change to optimize the value it receives for its products. The company has built a solid financial framework and flexible business plan which will help CVE to navigate this period of volatile commodity prices and remain focused on preserving the strength of its balance sheet.

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

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: CVE remains committed to achieve its targets and is ready to ride the growth wave once the dust settles. As per TSX, the stock of CVE is trading close to its 52-weeks’ low of CAD2.06. The stock of CVE gave a return of 128.2% in the past three months and a return of 0.83% in the last one month. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and have arrived at a target upside of lower double-digit (in percentage terms). For the said purposes, we have considered Devon Energy Corp, Suncor Energy Inc, etc. as peers. Considering the attractive trading levels, strong balance sheet and positive long-term outlook, we recommend a ‘Buy’ rating on the stock at the current market price of CAD6.07, down by 4.2587% on 26 June 2020.

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

Suncor Energy Inc.

Innovative Sustainable Fuel Technology and Investment Structure: Suncor Energy Inc. (TSX: SU) is one of Canada's largest integrated energy companies, operating in western Canada, east coast Canada, the United States, and the North Sea. As on 26 June 2020, the market capitalization of the company stood at CAD33.98 billion. Suncor Energy Inc., and leading Japanese trading and investment company, Mitsui & Co., Ltd. are investing $15 million and $10 million, respectively, in LanzaJet, Inc., which will produce sustainable aviation fuel for a sector requiring climate friendly fuel options.

Quarterly Performance (For the Period Ended 31 March 2020): During the first quarter of 2020, the company witnessed a setback due to the outbreak of COVID-19. This was because of oversupply of crude oil resulting in a substantial decline in crude oil prices. During the quarter, Funds from operations stood at CAD1.001 billion as compared to CAD2.585 billion in the prior year quarter. In the same time span, cash flow provided by operating activities was CAD1.384 billion. In response to the changing environment, SU leveraged the flexibility of its integrated asset base with a continued focus on value over volume across the company’s assets. In the first quarter, the company also enhanced its liquidity by securing an additional credit facility of CAD2.5 billion for a 24‑month term.

Key Risks: The company faced a lower demand for fuel during the global pandemic. The situation is likely to continue until the weather clears and production of crude meets its demand. Suncorp is also exposed to various other risks including inventory risk. Overestimation of normalization could influence actual results.

Future Expectations and Guidance: Suncor is well-positioned to weather the challenges of the evolving and complex business environment. To preserve the financial health and resiliency of the company, the company has reduced the capital expenditure range to $3.6 billion to $4.0 billion for 2020. It will concentrate on sustaining projects with high‑value and low capital economic investment projects. It is also focused on maintaining a strong balance sheet and liquidity throughout all market environments.

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

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: The company is focusing on capital portfolio on value‑driven investments that will enhance margins, improve business processes, and reduce operating and sustaining capital costs. The stock of SU is inclined towards its 52-weeks’ low level of CAD14.03, proffering a decent opportunity for the investors to enter the market. The stock of SU gave a return of 23.98% in the past three months and holds potential for further growth. We have valued the stock using EV/Sales Multiple Based Illustrative Relative Valuation Approach and have arrived at a target upside of lower double-digit (in percentage terms). Considering the current trading levels, decent returns in the past three months and value driven investments of the company, we recommend a ‘Buy’ rating on the stock at the current market price of CAD22.28, down by 2.2807% on 26 June 2020.

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

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.