Cenovus Energy

Cenovus Energy (TSX: CVE) is an integrated oil company and is engaged in the business of developing, producing and marketing crude oil, natural gas liquids and natural gas in Canada with marketing activities and refining operations in the United States.

Q2FY20 Financial Highlights: CVE announced its second-quarter results, wherein the Company reported revenue of CAD 2,174 million as compared to CAD 5,603 million in the previous corresponding period. The significant decline was primarily attributable to lower revenue from oil sands and refining and marketing segments. Oil Sands revenues declined during the period due to lower average realized price, partially offset by lower royalties and higher sales volumes. While refining revenues witnessed a jolt due to a lower refined product pricing coupled with a decline in average refined product benchmark prices and lower refined product output. The quarter was marked by increased costs which include purchased product, transportation and blending expense, general and administrative expense, finance Costs, and depreciation, depletion and amortization expense as compared to the previous corresponding quarter partially offset by lower operating cost and a higher foreign exchange gain. The Company reported a net loss of CAD 235 million as compared to a profit of CAD 1,784 million in the previous corresponding period (pcp).

Q2FY20 Income Statement Highlight (Source: Company Reports)

Risks: The group’s performance is directly related to the demand and price of oil and gas. Any volatility in oil and gas prices is likely to affect the group’s performance adversely.

Valuation Methodology: EV to Sales based Relative Valuation (illustrative)

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

Stock Recommendation: The company remained focused on financial resilience and used the flexibility of its assets and marketing strategy to adapt quickly to the changing external environment. The company reduced the volumes at its oil sands operations and storing the mobilized oil in its reservoirs for production when the price declined in April. The company ramped up the production when Western Canadian Select (WCS) prices increased almost tenfold from April to an average of CAD 46.03 per barrel (bbl) in June. As a result of this decision, the group reached record volumes at its Christina Lake oil sands project in June and achieved free funds flow for the month of more than CAD 290 million. Further, the company mentioned that its low-cost structure would help it to withstand a continued period of low prices if necessary. On the liquidity front, the company have ample liquidity of CAD 5.6 billion in committed credit facilities, which would support the near-term working capital requirements. The company has taken prompt measures and lowered its capital investments, operating cost and general and administrative expenses, to support the liquidity. The demand for oil and gas is likely to grow as most of the governments are allowing industrial operations to resume and easing the lockdown restrictions, which were in place during most of the second quarter. The stock gained ~52% in the last three months and outperformed the index by ~35%. We have valued the stock using EV to Sales-based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered peers like Devon Energy Corp, Imperial Oil Ltd, Suncor Energy Inc etc. Hence, we recommend a ‘Buy’ rating on the stock at the current market price of CAD 6.73 on July 24, 2020.

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

Suncor Energy

Suncor Energy (TSX: SU) is one of the largest integrated energy companies in Canada. The group operates in western Canada, east coast Canada, the United States, and the North Sea. The upstream portfolio includes bitumen, synthetic crude, and conventional crude, which helps to offset higher-cost oil sands production. Suncor's upstream production is supported by its refining operations having a capacity of 462,000 barrels a day. The company holds ~7.4 billion barrels of proven and probable crude oil reserves. The Group operates across four major segments, namely oil sands, exploration & production, refining and marketing and corporate & eliminations.

Q2FY20 Financial Highlights: SU declared its quarterly results, wherein the company reported revenue of CAD 4,245 million, significantly lower than CAD 10,098 million in Q2FY19. The decline was due to a considerable fall in the Oil Sands and Refining & Marketing revenues. Total Oil Sands sales volumes stood lower at 559.5 mbbls/day compared to 694.3 mbbls/day in Q2FY19. The Company reported an operating loss of CAD 1,489 million as compared to an operating profit of CAD 1,253 million in the previous corresponding period (pcp), primarily attributable to an operating loss of CAD 1,196 million from Oil Sands segment, as compared to operating earnings of CAD 651 million in pcp. The quarter was marked by lower purchases of crude oil and products, decline in operating, selling & general expenses and a lower exploration expense. The Company reported a net loss of CAD 614 million as compared to a net profit of CAD 2,729 million, a year ago. The Company declared a quarterly dividend of CAD 0.21 per share, payable on September 25, 2020.

Q2FY20 Financial Highlights (Source: Company Reports)

Risks: The company’s performance is directly related to the price and demand of oil and gas. Any volatility in the prices or any setback to the demand would affect the group’s performance.

Valuation Methodology: EV to Sales Based (Illustrative)

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

Stock Recommendation: The Stock Corrected ~46% so far this year due to a lower investor’s sentiment coupled with the erosion of crude oil commodity prices. The company has reported lower cash costs of CAD 25.80 per barrel as compared to CAD 27.80 per barrel, supported by cost reductions and lower unplanned maintenance activities. A lower structure is likely to provide cushion to the margin. To ensure enough liquidity, the Group has reduced its capital expenditure and operating costs by CAD 1.9 billion and CAD 1.0 billion, respectively. Furthermore, to support the liquidity, the Group issued senior and medium unsecured notes amounting CAD 1.25 Billion, augurs well to improve financial flexibility and resiliency. Despite the challenging environment, the group has declared dividend during the quarter. At the last traded price, the stock was offering an attractive dividend yield of ~3.74%, which is decent considering the current interest rate environment. Oil prices have shown some recovery in the recent past, which is likely to provide respite to the company’s topline. Further, we expect the demand for oil and gas to increase as the governments across the states are easing lockdown restrictions. We have valued the stock using EV to Sales based relative valuation method and have arrived at a target upside of double digit (in percentage terms). For the said purposes, we have considered peers like Imperial Oil Ltd, MEG Energy, Cenovus Energy Inc etc. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 22.42 on July 24, 2020.

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

*Please be aware that dividends are variable and not guaranteed.

Disclaimer

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