Cenovus Energy Inc

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 

• Generated higher operating margin: The group generated an operating margin of CAD 1,879 million in Q1 2021, up from a negative CAD 589 million in Q1 2020, owing to higher average realized crude oil, NGLs, and natural gas sales rates, as well as higher demand and higher market crack spreads.

Source: Company 

• A rise in adjusted funds flows: The company reported higher cash from operating activities and adjusted funds flow in Q1 2021, which stood at CAD 228 million and CAD 1,141 million, respectively, compared to CAD 125 million and CAD (154) million in Q1 2020.The rise was mainly due to increased operating margin, partly offset by CAD 223 million in acquisition expenses and CAD 111 million charged in conjunction with the accelerated bonus of Cenovus workers.

Source: Company

• Increased oil sand production: Due to higher average realized rates, lower shipping costs, and additional volumes added by the purchased reserves, the Oil Sands division created an operating margin of CAD 1.1 billion, compared to a negative CAD 272 million in the first quarter of 2020. The output of total Oil Sands crude oil averaged 553,396 bbls/d, with sales volumes of 565,289 BOE/d, compared with production of 387,036 bbls/d and sales of 397,971 BOE/d a year ago. 

• Management’s guidance for 2021: Recently, the company released its guidance numbers for 2021, including sustaining capital of approximately CAD2.1 billion to deliver upstream production of roughly 755,000 BOE/d and downstream throughput of approximately 525,000 bbls/d. The company also expects to achieve nearly CAD 1 billion of synergies this year due to the recent transaction with Husky. 

Financial overview of Q1 2021 (In Millions of CAD)

Source: Company 

• In Q1 2021, the revenues increased tremendously by 131% to CAD 9,150 million, against CAD 3,961 million in the previous corresponding period. The higher revenue was primarily due to higher sales volume and higher price per unit sold.         

• The company posted an EBIT of CAD 294 million in the reported quarter against a loss of CAD 2,145 million in the previous corresponding period. The turnaround happened due to a robust increase in revenue, partially offset by higher purchased product cost and higher DD&A expenses.
• Net income stood at CAD 220 million in Q1 2021, against Net loss of CAD 1,797 million in pcp. The change was primarily due to the factors discussed above. 

Risks associated with investment

The company’s revenue is highly correlated to the oil prices. Any volatility in oil prices is likely to affect its performance. Other factors that could impact the financial performance are low demand for oil & gas and financial risk on behalf of their hedged positions. 

Valuation Methodology (Illustrative): EV to EBITDA 

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

Following the purchase of Husky Energy Inc. on January 1, 2021, the firm delivered strong operational and financial results in the first quarter of 2021. As compared to the whole year of 2020, crude oil prices improved dramatically in the first quarter. Commodity prices are being supported by OPEC's continued discipline, rising COVID-19 vaccination, and expected economic recovery. The group produced nearly 770,000 barrels of oil equivalent per day (BOE/d) in the quarter and generated adjusted funds flow of more than CAD 1.1 billion, free funds flow of CAD 594 million and net earnings of CAD 220 million. During the reporting timeframe, the company's success greatly aided it in staying on track, delivering on its expected merger synergies and 2021 budget and production guidance. Therefore, based on the above rationale and valuation, we recommend a "Buy" rating on the stock at the closing price of CAD 9.26 on May 10, 2021.  We have considered Canadian Natural Resources Ltd, MEG Energy Corp, Imperial Oil Ltd, etc., as the peer group for the comparison.

1-Year Price Chart (as on May 10, 2021). Source: Refinitiv (Thomson Reuters)

Sandstorm Gold Ltd.

Sandstorm Gold Ltd. (TSX: SSL) provides financing to companies engaged in gold mining through gold stream and royalty. Geographically, the company has operational footprints in North America, South & Central America, Africa, and Asia & Australia.

Key Updates:

• Impressive Outlook: For FY21, the company expects its Gold Equivalent sales within the range of 55,000–62,000 ounces, higher than FY20 gold sales of 52,176 ounces. Notably, the company expects continuous improvement in its gold equivalent production in the coming years and expects it to reach ~125,000 ounces in FY24.                                   

Source: Company Presentation

• Growing Asset and Reserves base: During the last decade, the company has increased its asset based significantly from 5 assets in 2010 to more than 200 assets in 2020, which is worth mentioning. Additionally, from the Company’s properties, more ounces were discovered than mined during 2016-2020. In FY2020, company reported 52,000 production ounces while the discovered ounces were 54,000, resulting a positive impact on the mine reserves.                 

Asset Base (Source: Company Presentation)                                                                   

Mining Discoveries (Source: Company Presentation)

• Ample Liquidity: The company has ample liquidity of USD 500 million, which includes USD 300 million of credit facility, USD 75 million of cash from operations and USD 125 million of cash balance. The current liquidity level seems to be sufficient to meet the company’s working capital requirements and capital investments.                   

Liquidity Snapshot (Source: Company Presentation)

• Negligible Debt: SSL has negligible debt in its balance sheet. Notably, the company reported its total debt of USD 2.8 million, significantly lower than USD 53.2 million in Q1FY20, which shows prudent capital management.

Q1FY21 Financial Highlight:

• SSL impresses with its quarterly result, wherein the company posted revenue of USD 30.997 million, surged from USD 21.332 million in the previous corresponding period (pcp). The increase was driven by higher Attributable Gold Equivalent ounces sold (17,444 ounces v/s 13,393 ounces in pcp), coupled with increase in Average realized gold price (USD 1,777/ounce v/s USD 1,593/ounce).

Source: Company Report

• Gross profit stood at USD 15.725 million, soared from USD 8.559 million in Q1FY20. The increase was driven by elevated sales, partially offset by higher cost of sales (USD 5.350 million v/s USD 4.209 million in pcp).
• The company reported net income of USD 969 million, as compared to a net loss of USD 10.342 million in pcp. The growth was supported by lower stream, royalty and other interests impairments expense (USD 0.408 million v/s USD 8.877 million in pcp), decline in loss on revaluation of investments (USD 1.794 million v/s USD 5.852 million in pcp), partially offset by higher administration expenses (USD 2.381 million v/s USD 2.062 million in pcp).

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: The company’s operations are correlated with the international gold prices and a price volatility would impact the group’s margins and cash flows.

Valuation Methodology (Illustrative): Price to Cash Flow 

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock Recommendation:

The corporation reported a robust margins in Q1FY21, higher than the industry median, which indicates prudent cost management. EBITDA margin and operating margin stood at 71% and 29.3%, respectively, higher than 40.9% and 26.3% of the industry median. Moreover, net margin stood at 16%, as compared to the industry median of 14.6% during Q1FY21.

Source: Refinitiv (Thomson Reuters)

The company has a diversified portfolio Less than 70% of Sandstorm’s value is concentrated in its top 5 assets, which indicates a balanced risk profile. We have valued the stock using the Price to CF-based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered peers like Wheaton Precious Metals Corp, Franco-Nevada Corp and Maverix Metals Inc. Hence considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of SSL at the last closing price of CAD 9.46 on May 10, 2021.

One-Year Price Chart (as on May 10, 2021). 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.