“Be fearful when others are greedy, and be greedy when others are fearful.” —Warren Buffett
People have short memories.
Remember back to the start of 2016, when West Texas Intermediate Crude (WTIC) had just fallen from $105 all the way to $26 in 18 short and perilous months?
It was doomsday, until oil went on to rebound, doubling, in fact, in the four months that followed.
And now it’s déjà vu all over again, as the price of crude has fallen 20% since the start of 2017. Everyone is biting their fingernails, and energy stocks have once again become “cheap.”
Speculators who have a bullish leaning on the direction of oil may prefer something a bit on the “riskier” side, like, for example, Baytex Energy Corp. or even Encana Corp.
These two companies are among those that have the most to lose if prices stay lower for longer, which also means they have the most to gain if conditions improve.
Yet most investors will likely be willing to trade a little bit on the upside for more protection on the downside.
In line with that outlook, consider both Cenovus Energy Inc. (TSX: CVE)(NYSE: CVE) and Crescent Point Energy Corp. (TSX:CPG)(NYSE:CPG).
Both of these companies have had their shares sell off with the broader energy decline, presenting an opportune time to snap up the shares of these “blue-chip” companies that are widely considered to be among the higher-quality names in the energy space.
The question is, between Cenovus and Crescent Point, which is the better buy?
Getting better value
To be perfectly frank, both stocks score very high on the value criteria.
Crescent Point shares trade at 0.5 times book value, while Cenovus shares trade at one times book value.
Keep in mind that the Nobel Prize-winning Fama-French model suggests that stocks trading near or below book value should be expected to outperform the market.
To boot, Crescent Point shares trade at just three times cash flow from operations, and Cenovus trades at a price-to-cash flow ratio of 7.7.
Give the edge to Crescent Point on the price-to-cash flow metric, but anything below 10 times is very solid.
Which one has the better dividend?
One of the problems in analyzing the dividends of these two companies is that they are both currently operating in the red, making the return-on-equity and payout-ratio measures relatively useless.
This makes it extremely difficult to assess which company is better positioned to grow its dividend payout over the long term.
What we do know is that Crescent Point currently offers shareholders a 3.91% dividend yield, while Cenovus falls short at nearly half Crescent Point’s payout at 2.03%.
Give Crescent Point the definitive edge with respect to the dividend, but also keep in mind the caveat that if oil prices continue to stay lower for longer, both of these dividends may find themselves in jeopardy.
The outlook
The forecast is for the conditions to improve materially for both of these companies over the next year.
Analysts are calling for Cenovus sales to be 50% higher in 2017 vs. 2016, while the expectations aren’t quite as rosy for Crescent Point, which is expected to grow by 26% this year and 5% in 2018.
Both companies are expected to return to profitability in the next 12 months, further supporting the bull thesis; however, Cenovus is expected to show better year-over-year growth compared to Crescent Point.
Conclusion
Crescent Point appears to be the better play of the two as it scores considerably better on the value criteria, both in terms of the price-to-book and price-to-cash flow metrics, which are critical in terms of protecting investors on the downside.
Yet without risk, there is no reward. That Crescent Point shares trade at a “cheaper” valuation and have a higher dividend yield suggests that it may be cheap with good reason.
It could very well be that if oil prices stay at current levels or decline, Crescent Point shares will fare worse than those of Cenovus.
Yet if that happens, it probably won’t matter if you chose Crescent Point or Cenovus, as both are likely to be money-losing propositions at that point.
How greedy — or, to put it differently, how Foolish — do you want to be?
