Does Cenovus Energy Deserve a Downgrade?

Does this analyst make a good case? Or is it just more noise from Wall Street?

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While Fools should generally take analyst opinions with a grain of salt, it’s not a bad idea to take a closer look at particularly stock-shaking upgrades and downgrades — just in case the reasoning behind the call makes sense.

What: Shares of Cenovus Energy Inc. (TSX:CVE)(NYSE:CVE) slipped slightly on Friday after TD Securities downgraded the bitumen, oil, and gas developer from buy to hold.

So what: Along with the downgrade, analyst Menno Hulshoff lowered his price target to $35 (from $38), representing about 33% worth of upside to yesterday’s cose. While contrarians might be attracted to Cenovus’ steady decline over the past year, Hullshoff thinks a rebound might take longer than expected given yesterday’s outlook from management.

Now what: According to TD, Cenovus’ risk/reward tradeoff is pretty balanced at this point. “Although our long-term investment thesis has not changed and we believe that these issues likely prove to be nothing more than a short-term challenge, we acknowledge that it may take some time for CVE to prove that the fundamental [Foster Creek] outlook has not changed,” noted Hulshoff. “More specifically, FC [steam-to-oil ratio] and sustaining capital costs are not expected to normalize until early 2015, while optimization work has been deferred until its new operating procedures have been assessed.”

With the stock flirting with its 52-week lows and currently boasting a 3%-plus dividend yield, however, those short-term concerns might be providing energy-savvy Fools with a juicy long-term income opportunity.

 

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 Brian Pacampara owns no position in any of the companies mentioned.

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