Over the past two weeks, investors have had the opportunity to purchase shares in Cenovus Energy Inc. (TSX: CVE)(NYSE: CVE) at a bargain price (comparatively speaking).
The company, an integrated oil company, develops, produces, and markets oil and natural gas in Canada. The decline in the share price has been substantial over the past few years. Looking as far back as 2009, the company typically traded around the $30 mark with relatively minor fluctuations. In 2014, shares took a nosedive from a high of almost $35 to a current price under $10 per share.
Long-term investors have been patient for close to two years and have lost more than 70% of their capital from the highs of 2014.
The good news for those looking to make an investment in the oil sector is that shares of Cenovus may be ripe for the taking. Like many oil exploration companies, shares have been decimated by the market to the point that the total market capitalization is worth less than the equity on the balance sheet. When taking the total assets and subtracting all liabilities and goodwill, the total amount of tangible equity per share of this company is nothing less than $13.77 per share. As a reminder, shares are currently trading at less than $10 each!
Although Cenovus has been hit hard, it is important to keep in mind that this company is an integrated company and is not solely dependent on the extraction of oil from the ground. This means that the effects of low oil prices will not be felt as hard than for other development-only companies.
While the dividend had to be cut during the large oil sell-off in 2015, shareholders are still receiving $0.05 per share every quarter, which equates to a dividend yield in excess of 2%; it should not be at risk of being cut. For fiscal 2016, the company paid out only $166 million in dividends out of cash flow from operations (CFO) of $861 million. Heading into this current fiscal year, the CFO for Q1 is $328 million, of which dividends of $41 million were paid to shareholders.
The excellent news for investors is the earnings per share, which were negative over the past two fiscal years, have turned positive for the first quarter of this year. While it may take a long time yet for this name to get out of the woods, investors should keep in mind that revenues per share have increased in each quarter since the first quarter of 2016. Clearly, the tide is moving in the right direction.
Although many oil companies are trading at large discounts to tangible book value, it is important for investors to understand the nature of the investment they are making. The biggest driver for almost any oil company will be the underlying price of oil, which will drive the share price much higher. Barring a recovery, investors will need to be patient for a long time yet.
