Cenovus Energy Inc. Reduced its Dividend: What Should You Do?

Cenovus Energy Inc. (TSX:CVE)(NYSE:CVE) released weak second-quarter earnings on July 30, but its stock has responded by rising over 2%. What should you do with it today?

| More on:
The Motley Fool

Cenovus Energy Inc. (TSX:CVE)(NYSE:CVE), one of largest integrated oil and gas companies in Canada, announced second-quarter earnings results on the morning of July 30, and its stock has responded by rising over 2% in the trading sessions since. The company’s stock still sits more than 45% below its 52-week high of $34.70 reached back in September 2014, so let’s take a closer look at the results to determine if we should consider initiating long-term positions today.

Low commodity prices lead to a disappointing performance

Here’s a summary of Cenovus’s second-quarter earnings results compared with its results in the same period a year ago.

Metric Q2 2015 Q2 2014
Diluted Earnings per share $0.15 $0.81
Revenue, Net of Royalties $3.73 billion $5.42 billion

Source: Cenovus Energy Inc.

In the second quarter of fiscal 2015, Cenovus’s net earnings decreased 79.5% to $126 million, its diluted earnings per share decreased 81.5% to $0.15, and its revenue decreased 31.3% to $3.73 billion compared with the same quarter a year ago.

The company noted that these very weak results could be attributed to “the low commodity price environment,” which led to its average realized selling price of crude oil, including hedging, decreasing 34.6% to $51.23 per barrel and its average realized selling price of natural gas, including hedging, decreasing 33.8% to $3.21 per thousand cubic feet.

Here’s a quick breakdown of 10 other notable statistics from the report compared with the year-ago period:

  1. Total oil production decreased 0.9% to 199,954 barrels per day
  2. Oil sands production increased 4.7% to 130,734 barrels per day
  3. Conventional oil production decreased 9.9% to 69,220 barrels per day
  4. Natural gas production decreased 11.2% to 450 million cubic feet per day
  5. Revenue decreased 30% to $2.44 billion in its refining & marketing segment
  6. Revenue decreased 32.7% to $875 million in its oil sands segment
  7. Revenue decreased 43.7% to $482 million in its conventional oil segment
  8. Cash flow decreased 59.9% to $477 million
  9. Operating earnings decreased 68.1% to $151 million
  10. Capital investments decreased 48% to $357 million

Cenovus also announced a 39.9% reduction to its quarterly dividend to $0.16 per share because it expects “a prolonged period of low oil prices,” and the next payment will come on September 30 to shareholders of record at the close of business on September 15.

What should you do with Cenovus Energy today?

It was a very weak quarter for Cenovus, and its dividend reduction made the earnings release even worse, so I do not think its stock has responded correctly by moving higher. With this being said, I think the stock will head lower from here for two reasons in particular.

First, oil and natural gas prices remain under pressure, which will lead to further headwinds in the second half for Cenovus.

Second, Cenovus’s stock still trades at very high valuations, including 476.5 times fiscal 2015’s estimated earnings per share of $0.04 and 112.1 times fiscal 2016’s estimated earnings per share of $0.17, both of which are very expensive compared with its five-year average price-to-earnings multiple of 27.9 and the industry average multiple of 25.8.

With all of the information provided above in mind, I think Foolish investors should avoid Cenovus Energy for the time being, and only revisit it when commodity prices recover and it gets back on the path of growth.

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 Joseph Solitro has no position in any stocks mentioned.

More on Energy Stocks

pipe metal texture inside
Energy Stocks

Does a 7.5% Yield With Relative Stability Sound Good? Consider This Energy Giant

Here's why Enbridge (TSX:ENB) remains a top dividend stock long-term investors should consider in this current macro environment.

Read more »

golden sunset in crude oil refinery with pipeline system
Energy Stocks

Why Enbridge Stock Belongs in Every Portfolio

Do you own Enbridge (TSX:ENB) in your portfolio? Here's why every investor needs to own some Enbridge stock.

Read more »

A worker overlooks an oil refinery plant.
Energy Stocks

Oil at $90? How These 2 TSX Energy Stocks Could Win Big

High Brent crude oil prices could punish short-sellers on one small TSX energy stock and fortify Parex Resources (TSX:PXT) stock's…

Read more »

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 »