Cenovus Energy Inc.’s ( CVE Quick Quote CVE - Free Report) stock has surged 61.4% in the past three months, outperforming the 50.7% rise of the industry. Calgary, Canada-based Cenovus is a leading integrated energy firm, with a market cap of $8 billion. It continues to benefit from the massive oil projects in Alberta. Can It Retain Momentum?
The answer is yes and here’s why we think so:
From 2020 to 2024, Cenovus expects to see compound annual production growth of 2-3%. With disciplined capital investment and production growth, the integrated energy player projects consistent growth in earnings and funds flow during the period.
To navigate through the current market volatility, the company slashed 2020 capital spending twice — amounting to a total of around $600 million — from its original guidance of C$1.3-C$1.5 billion provided in December 2019. However, production is expected to rise, reflecting immense capital efficiency gain.
The company, on Nov 9, signed an accord to divest Marten Hills oil properties for a total consideration of C$100 million, including both cash and stocks. However, it has decided to capitalize on the future development of Clearwater formation at the oil assets and hence will retain a gross overriding royalty interest.
Moreover, the Zacks Rank #3 (Hold) company recently completed the strategic acquisition of Husky Energy. The all-stock accord has created the third-biggest energy producer in Canada. The combined entity is expected to have a production capacity of 750 thousand barrels of oil equivalent per day (MBoe/d). In terms of refining and upgrading, the combined entity is now the second largest in Canada. It has a total upgrading and refining capacity of 660 MBoe/d, along with crude storage capacity of 16 million barrels. The merger is expected to enable Cenovus to better navigate through the current low-margin environment in the fuel market.
However, there are a few factors that are holding back the stock from reaching its complete potential. Although the company’s cash balance of C$404 million can easily help it clear its short-term borrowings of C$137 million, the integrated energy player’s capability of paying long-term debt of C$7,797 million is questionable. This is because the company has been witnessing a declining trend in revenues, signifying weak operations. Moreover, the coronavirus pandemic has hurt global energy demand, which in turn dented refining margins. Thus, the virus outbreak has been hurting Cenovus Energy’s refining business. Nevertheless, we believe that its systematic and strategic plan of action will drive long-term growth.
Stocks to Consider
Some better-ranked players in the energy space include
TC PipeLines, LP , Suncor Energy Inc. ( SU Quick Quote SU - Free Report) and Summit Midstream Partners, LP ( SMLP Quick Quote SMLP - Free Report) , each holding a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here .
TC PipeLines’ bottom-line estimates for 2021 have increased nearly 5% in the past 60 days.
Suncor’s sales for 2021 are expected to increase 18.2% year over year.
Summit Midstream’s bottom-line estimates for 2021 have increased 12.4% in the past 60 days.
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