Which Is the Better Buy Now: Cenovus Energy Inc. or Husky Energy Inc.?

Here are three things to consider when choosing between Cenovus Energy Inc. (TSX:CVE)(NYSE:CVE) and Husky Energy Inc. (TSX:HSE).

| More on:
The Motley Fool

The 50% plunge in the price of oil caused a deep sell-off in oil stocks. We see this in well-known Canadian oil stocks Husky Energy Inc. (TSX:HSE) and Cenovus Energy Inc. (TSX:CVE)(NYSE:CVE), which are down by 22% and 30%, respectively, over the past year. Those discounted stock prices have caught the eye of investors looking for a bargain. However, there are three things to consider before deciding between the two.

Valuation

Given the fact that Cenovus Energy’s stock is down 30% over the past year, one would think it’s the cheaper stock. However, when we take a closer look and compare the two valuations we find something rather surprising.

hse vs cve valuation

As we see on that first chart the two are really neck and neck when it comes to their PE ratios, which is typically the first place investors look when comparing valuation. However, when we take a step back and look at the enterprise value compared with the EBITDA ratio, which factors in things such as leverage and the business’ underlying cash flow, we find that Husky Energy is much cheaper than Cenovus Energy. That certainly gives Husky Energy a leg up on Cenovus when considering which one is the better buy.

Balance sheet

The next factor to consider when choosing between the two is to compare their balance sheets. Given how weak oil prices are right now, and no real signs that a meaningful recovery is near, we’d want to own a company with a strong balance sheet. Here again we see that there is an obvious winner.

hse vs cve balance sheet

Husky Energy’s leverage ratio is about half of Cenovus Energy’s ratio. One reason for this is because Cenovus has about a half a billion more in net long-term debt than Husky, despite the fact that Husky is $10 billion bigger on an enterprise value basis. In fact, debt makes up 21% of Cenovus’ enterprise value, while it only makes up 13% of Husky’s enterprise value. Clearly, Husky Energy has the better balance sheet between the two.

Returns

However, before we declare Husky Energy the better buy we need to look at one more area, which is the returns these companies earn on the capital they invest on their investors’ behalf. Here we find that the two are rather close in returns on equity, assets, and capital employed.

hse vs cve returns

In this case, Cenovus Energy actually earns slightly better returns on equity and capital employed, while Husky Energy is a hair better when it comes to returns on assets. We actually should expect Cenovus’ returns to be better because of the fact that it uses more leverage and that extra leverage should juice its returns. That said, that extra leverage doesn’t boost Cenovus’ returns by a high enough rate that would make it a better buy over Husky Energy.

Investor takeaway

Cenovus Energy’s stock might have sold off by a greater percentage, but that still doesn’t make it cheaper than Husky Energy. Further, Husky Energy has a better balance sheet and its returns are in line with what Cenovus can generate, despite the fact it uses more leverage. Add it all up and Husky Energy is clearly the better stock to buy.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Matt DiLallo has no position in any stocks mentioned.

More on Energy Stocks

Arrowings ascending on a chalkboard
Energy Stocks

Beat the TSX With This Cash-Gushing Dividend Stock

Canadian Natural Resources stock is well set up to beat the TSX as it continues to generate strong cash flows…

Read more »

energy industry
Energy Stocks

2 TSX Energy Stocks to Buy Hand Over Fist Now

These two rallying TSX energy stocks can continue delivering robust returns to investors in the long term.

Read more »

green energy
Energy Stocks

1 Magnificent TSX Dividend Stock Down 37% to Buy and Hold Forever

This dividend stock has fallen significantly from poor results, but zoom in and there are some major improvements happening.

Read more »

oil tank at night
Energy Stocks

3 Energy Stocks Already Worth Your While

Here's why blue-chip TSX energy stocks such as Enbridge should be part of your equity portfolio in 2024.

Read more »

Solar panels and windmills
Energy Stocks

1 Beaten-Down Stock That Could Be the Best Bet in the TSX

This renewable energy stock could be one of the best buys you make this year, as the company starts to…

Read more »

Dice engraved with the words buy and sell
Energy Stocks

Is Enbridge Stock a Buy, Sell, or Hold?

Here's why Enbridge (TSX:ENB) remains a top dividend stock long-term investors may want to consider, despite current risks.

Read more »

Gas pipelines
Energy Stocks

If You Had Invested $5,000 in Enbridge Stock in 2018, This Is How Much You Would Have Today

Enbridge's high dividend yield hasn't made up for its dismal total returns.

Read more »

Bad apple with good apples
Energy Stocks

Avoid at All Costs: This Stock Is Portfolio Poison

A mid-cap stock commits to return more to shareholders, but some investors remember the suspension of dividends a few years…

Read more »