Cenovus Energy Inc.: Are Better Days Ahead?

Investors often overlook Cenovus Energy Inc. (TSX:CVE)(NYSE:CVE). That might be a mistake.

| More on:

Cenovus Energy Inc. (TSX:CVE)(NYSE:CVE) has done a good job of riding out the oil rout.

Let’s take a look at the current situation to see if the stock is destined to rally next year.

Tough two years

Cenovus drastically reduced staff, shut down expansion projects, and slashed its dividend over the past two years in an effort to protect cash flow amid a steep plunge in oil prices.

These moves have helped the company survive the rout, but investors still saw the stock fall from $34 in the summer of 2014 to below $14 in February this year.

Since then, oil prices have improved, and the stock has bounced nearly 50% to the current price of $20.50. That’s still a far cry from the pre-crash levels, but Cenovus has fared much better than many of its oil sector peers.

Optimism heading into 2017

The difficult decisions made through the crash have positioned the company well to benefit when the market recovers, and it looks like 2017 could be the beginning of a rebound.

Why?

Cenovus recently said it plans to boost capital spending by 24% next year to $1.2-1.4 billion.

The increase comes as the company looks to resume an expansion project at its Christina Lake facility. Management halted the work during the downturn and has since managed to squeeze an additional $500 million out of the cost structure through modifications to the construction plan and revised bids from contractors.

With progress at Christina Lake and additional expansion work under way at the Foster Creek site, Cenovus is targeting a 20% year-over-year increase in oil sands production for 2017.

Total production, including the oil sands and conventional oil operations, should jump by 14% in 2017 compared to this year’s guidance.

Cenovus plans to keep its sustaining capital budget in the oil sands division essentially unchanged in 2017 from the 2016 target. Going forward, management sees oil sands sustaining capital costs coming in at close to $7 per barrel, which is half the costs incurred in 2014.

Should you buy?

Investors often bypass Cenovus when looking for an oil-patch pick, but that might be a mistake. The company has reduced its cost base to the point where it is comfortable raising its capital plan significantly at current oil prices, and the huge boost to production next year bodes well for cash flow and a potential dividend increase.

If oil manages to push higher in 2017 and beyond, this stock should rack up some strong gains.

Given the ongoing volatility in the oil market, I wouldn’t back up the truck, but it might be worthwhile to take a small contrarian position in Cenovus while it remains an unloved stock.

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 Andrew Walker has no position in any stocks mentioned.

More on Energy Stocks

Natural gas
Energy Stocks

Canadian Natural Resources Stock (TSX:CNQ): Profiting From Natural Gas Strength

Soaring cash flows and dividends have come to characterize Canadian Natural Resources stock as well as other natural gas stocks.

Read more »

oil and natural gas
Energy Stocks

Oil Stocks: The Next 3 Months Are Key

Oil stocks like Suncor Energy Inc (TSX:SU)(NYSE:SU) are reporting earnings soon. There are two other big events happening, too.

Read more »

Oil pumps against sunset
Energy Stocks

Want Monthly Passive Income? These TSX Dividend Stocks Are for You

Create a passive income stream with monthly paying dividend stocks on the TSX such as Pembina Pipeline and Freehold Royalties.

Read more »

Group of industrial workers in a refinery - oil processing equipment and machinery
Energy Stocks

Why Suncor Energy Stock Could Lose its Underperformer Tag Soon

So far this year, SU stock has gained 21%, while TSX energy stocks at large have gained 38%.

Read more »

money cash dividends
Dividend Stocks

Canadian Investors: Where to Put $100 Right Now

Canadians with $100 to invest can put their money to work in three low-priced, dividend-paying TSX stocks.

Read more »

Dice engraved with the words buy and sell
Dividend Stocks

Not Every Cheap Stock has Value: 1 Stock to Buy, 1 to Sell, and 1 to Hold

The market downturn has created an opportunity to buy value stocks at a bargain. Here’s a guide to optimizing your…

Read more »

Upwards momentum
Energy Stocks

Gold and Energy: Here Are Two of the Best Stocks to Buy Now

Gold and energy stocks are some of the best to buy now for very different reasons.

Read more »

A worker overlooks an oil refinery plant.
Energy Stocks

Here’s Why I’m Buying the Dip in Suncor (TSX:SU) Today

Suncor Energy Inc. (TSX:SU)(NYSE:SU) stock is worth buying, even as oil and gas prices have softened in the second half…

Read more »