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Cenovus Energy Inc: The Best Dividend Growth Potential in the Patch?

Cenovus Energy Inc (TSX: CVE)(NYSE: CVE) normally sits in the shadows of its bigger oil sands colleagues, Suncor Energy Inc. (TSX: SU)(NYSE: SU) and Canadian Natural Resources Limited (TSX: CNQ)(NYSE: CNQ).

It might be time for this oil company to step into the spotlight.

Based in Calgary, Cenovus is an integrated oil company that develops, produces, and markets crude oil, natural gas liquids, and natural gas. With significant refining capacity, Cenovus processes more than 430,000 barrels per day of crude oil feedstock.

The company has not enjoyed the same stock price gains as Suncor and Canadian Natural, but I think the market will soon realize the value Cenovus holds.

Here are three reasons why I think investors should consider Cenovus Energy for their dividend income portfolio.

1. Oil sands production increases

In its Q2 2014 earnings statement, Cenovus reported a 33% increase in oil sands production compared to the same period in 2013. Total crude oil production averaged just over 200,000 barrels per day, an 18% increase from Q2 2013.

Cenovus has a 50% joint-ownership position in three major oil sands projects: Christina Lake, Foster Creek, and Narrows Lake.

ConocoPhillips (NYSE: COP) is the other partner on the projects. The joint-ownership approach has allowed Cenovus to minimize capital risk and pursue concurrent expansions at the sites.

The Christina Lake project delivered a 77% year-over-year production increase in the second quarter as phase E of the project hit its designed production capacity. The project has a total gross production capacity of more than 300,000 barrels per day.

The company says the phase F expansion at Christina Lake should be completed on budget and on schedule. Production is expected to begin in 2016.

Foster Creek, the other major oil sands site, operated in line with the company’s projections in Q2 and is expected to produce at the higher end of guidance for the remainder of the year.

Cenovus expects Foster Creek to be capable of producing 295,000 gross barrels per day by 2019.

The phase F main plant at Foster Creek was 96% complete at the end of the second quarter, with first production set to begin in Q4. The company expects the expansion to reach its design capacity within 18 months.

Phase G at Foster Creek was 73% complete at the end of Q2 and first production is expected in 2015. Phase H is nearly 50% complete and will begin production in 2016.

Narrows Lake is the third jewel in the Cenovus oil sands crown. The company expects the project to have a total capacity of 130,000 barrels per day developed in three phases. The project life will be 40 years.

2. Record cash flow

Cenovus produced record cash flow in the second quarter of nearly $1.2 billion. This was a 37% increase compared to the same period in 2013. CEO Brian Ferguson said Cenovus had strong contributions from all of its business operations.

As Cenovus continues to add production at its flagship oil sands projects, free cash flow should continue to increase. The company uses state-of-the-art technology to extract the oil and is becoming more efficient with each new development phase.

3. Increasing dividends

Cenovus has increased its dividend in each of the past three years. The current payout of $1.06 yields just over 3%.

The bottom line

Cenovus adds more production and improves its extraction processes with each expansion at its oil sands properties. The refining operations provide a nice cash flow buffer for times when oil prices fluctuate.

Considering the 3% dividend and all the future cash flow growth, I think now is a good time for long-term investors to buy Cenovus.

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Fool contributor Andrew Walker has no position in any stocks mentioned.

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