Cenovus Energy Inc. (TSX: CVE)(NYSE: CVE) shares have been gradually picking up positive momentum after free falling over the past few years. Shares are now up ~23% from all-time lows as bottom fishers pile into the stock. That’s a good technical sign, but are there any fundamental improvements that’ll sustain an upward rally? Or will Cenovus just fall back into the single digits?
There’s no question that Cenovus has made some really questionable deals in the past. Its most recent deal to acquire the oil sands assets of ConocoPhillips for $17.7 billion wasn’t a hit with investors, especially considering the ridiculous price tag which hurt the company’s balance sheet in a difficult oil environment, which may be sticking around for longer than originally expected.
Capex guidance cut; management team striving to reduce leverage
The management team recently cut its expectations for 2017 capital expenditures by $180 million — a ~9% reduction from the previous guidance. Although the company cut its capex slightly, it’s not expected to hurt the expected production for the year.
Cenovus will still be attempting to make some divestitures to improve the shape of its balance sheet, which I believe is critical at this point, especially since many of Cenovus’s peers have made significant improvements to reduce costs to adapt to a harsh low oil price environment. A conservative strategy would have been favourable for Cenovus, but instead, the management team decided it was worth the risk to double down on the oil sands.
I’m not a huge fan of Cenovus’s aggressive strategy. The company is overleveraged and will be scrambling to sell other assets to repair its balance sheet. To add more salt in the wound, CEO Brian Ferguson is going to be retiring at the worst time possible.
What about value?
Shares of CVE currently trade at a 4.5 price-to-earnings multiple, a 0.7 price-to-book multiple, a 0.7 price-to-sales multiple, and a 4.9 price-to-cash flow multiple, all of which are substantially lower than the company’s five-year historical average multiples of 24, two, 1.2, and eight, respectively.
Shares are ridiculously cheap based on traditional valuation metrics, but it’s important to remember that they’re cheap for a reason. Cenovus is going all-in on the oil sands, and unless you’re a huge bull, you should probably avoid CVE and opt for a “safer” alternative in the Canadian oil patch.
Although shares are cheap, I do not believe there’s a margin of safety involved with an investment at current levels. The bottom is probably not in just yet; there are still many reasons why shares could continue to decline.
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