The Motley Fool

Cenovus Energy Inc. Is Trading Well Below Book Value: Time to Buy?

The oil and gas industry has been on a rough ride for the past three years with the price of oil being in sharp decline. The result has been less investment in the industry, less capital expenditure, more layoffs, and more uncertainty. Oil companies have taken significant hits. One of the worst victims is Cenovus Energy Inc. (TSX:CVE)(NYSE:CVE) and its stock price, which recently hit an all-time low.

Cenovus is guilty of doubling down its risk when it acquired assets from ConocoPhillips that investors were not able to have a vote on. To add even more uncertainty to the company, the CEO at the helm of that acquisition, Brian Ferguson, has since announced he is retiring.  Investors unhappy with the acquisition might be relieved that Ferguson is leaving, but, at the same time, it won’t undo the acquisition.

Over the past 12 months, the company’s stock has been down over 46%. There are signs the bleeding might be over as the stock price has been stable and even increasing for the last two weeks. For a value investor that is not scared of risk, there is a potential for significant growth if oil prices recover.

However, even despite low oil prices, low-cost fracking has enabled production to recover in the United States. The production south of the border could result in more work for Canadian companies.

Should work pick up in Canada, Cenovus could be a big benefactor. The company has had consecutive quarters of positive net income figures and has seen year-over-year revenue growth of over 72%. With a price-to-book value of less than 0.70, the stock is heavily discounted, and it would be hard to imagine it could go much lower, especially if quarterly earnings continue to progress.

Husky Energy Inc. (TSX:HSE) is in a similar boat as Cenovus, although it’s not surrounded by as much controversy. Husky has been able to generate three consecutive profitable quarters. Year-over-year sales for Husky have even been a bit better than Cenovus’s, increasing by over 78%. However, the stock price has not seen the same improvements with a decline of over 10% in the past 12 months.

Although the decline at Husky has not been as significant as it has been for Cenovus, the stock is selling below book with a price-to-book-value ratio of 0.80. The current stock price is trading at 10 times its earnings, which also suggests the stock is a good value.

Bottom Line

Both Husky and Cenovus present good value options and both look to have found a floor. Where the stocks go from here will depend on oil prices and on earnings that are expected later this month.

Cenovus is the riskier stock of the two simply because of the free fall it has been in and the bad news surrounding it. For those same reasons, Cenovus has larger upside because it is more likely to have been oversold than Husky.

These are not options for a risk-averse investor, but they present excellent opportunities for value investors with money that can sit in the sidelines for a while.

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 David Jagielski has no position in any stocks mentioned.

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