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Cenovus Energy Inc.: Take Advantage of the Energy Patch’s Boxing Day Sale

As I type this, millions of Canadian consumers are heading to the mall, looking to get a good deal on all sorts of Boxing Day sales.

Like Black Friday sales in the U.S., Boxing Day blowouts have become a Canadian holiday tradition. Folks head out to spend the balances on their newly acquired gift cards, or to pick up a gift that Santa Claus must have forgotten at the North Pole.

Like with electronics or discounted Christmas items, each year the stock market also has a Boxing Day sale. Certain stocks and sectors are beaten up from tax-loss selling, or just from general weakness. Like with any sale, there’s risk — who hasn’t picked up something at the store they don’t really want just because it’s cheap? — but generally, it’s better to buy stocks when they’re cheaper. Just like it’s better to buy a television or new laptop on sale, it’s better to buy a stock with good long-term prospects while it’s temporarily down.

Lately, most value investors have been taking a look at the energy sector, myself included. Although I’d like to see the sector sell off a little further to get to that once-in-a-decade buying opportunity, I’m still pretty happy to be adding to high-quality names in the sector.

One of those names is Cenovus Energy Inc. (TSX: CVE)(NYSE: CVE), which has quietly transformed itself after the spinoff from EnCana in 2009 to become one of Canada’s largest oil sands operators. Let’s take a closer look at this energy behemoth, and why it belongs in your portfolio.

Upcoming growth

It’s true that oil sands production has ballooned in cost over the last few years, but investors who blindly believe that are missing the forest for the trees.

The vast majority of oil sands production cost is spent before a single drop of oil is pulled out of the ground. And since most oil sands projects are looking at a life of four or five decades, upfront costs aren’t such a big deal in the scheme of things, especially if you’re a long-term oil bull.

Cenovus has been aggressively investing in its oil sands projects, with the goal of expanding its total oil production to nearly 300,000 barrels per day by 2017, which is about 50% higher than today’s levels. As new phases of its oil sands production come online, capital costs are projected to start declining after 2015, dropping from a projected $2.6 billion in 2015 to less than $2 billion going forward.

Before crude dropped, the company was looking at production targets of 500,000 barrels of oil per day by 2023, which would make it one of the largest oil producers in the country. Perhaps that goal has been delayed, but those properties are still there, waiting to be developed. Eventually, when the price of crude cooperates, the company will be able to really supercharge its oil sands production.

Get paid to wait

Although the company’s share price has bounced back from lows hit last week, shares still yield 4.4%.

Upon first glance, the dividend looks a little dicey. Based on an average crude price of $75 per barrel, the company is projecting free cash flow of just $400 million, while the dividend will set it back $800 million.

Fortunately for income investors, prudent management ensures the safety of the company’s dividend. Cenovus is sitting on more than $1 billion in cash, which is enough to fund the shortfall for at least two years. By then, the company’s growth projects will start coming online. At that point capital expenditures go down, cash flow goes up, and the security of the dividend is much better. And that’s without a recovery in the price of crude.

There are many solid energy companies that belong in your portfolio. We have one more that our analysts like so much that we’re calling it our top pick for 2015. Check it out below!

Cenovus is a great pick. But there's one stock we like even better for 2015!

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Fool contributor Nelson Smith has no position in any stocks mentioned.

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