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Cenovus Energy Inc.: Is This Rally Sustainable?

Shares of Cenovus Energy Inc. (TSX:CVE) are up ~38% over the past month, as the company continues to move closer towards its divestiture goal, while oil prices inch closer to the mid-$50 levels. Cenovus is looking to obtain $5 billion from the sale of its assets to chip away at the debt created by the ConocoPhillips deal. The general public was clearly not a fan of this deal, as it lowered the health of the company’s balance sheet by a considerable amount in the midst of a challenging environment; however, I believe that at current levels, the fears and revolt are way overblown.

The debt-fuelled deal was certainly aggressive; however, it has to comforting to know that Cenovus has raised $1.5 billion from divestitures so far. In the most recent sale, Cenovus announced that it reached a deal to sell its Suffield assets for $512 million to the International Petroleum Corp.

Justin Bouchard, Desjardins Securities analyst, stated that it’s possible that Cenovus may surpass its original divestiture target if it’s able to sell its Deep Basin infrastructure assets, which he believes could be sold at ~$1.5 billion.

If you’re bullish on oil, Cenovus is probably one of the best stocks you could own. Although the company was slow to restructure following the rout in oil prices, I believe investor pessimism will gradually be replaced by optimism as more divestitures are made at or above the estimated price tags. That means shares of CVE could start to take off in sync with the direction of oil prices.

Is the current rally sustainable?

The current rally may be sustainable, but I’d urge investors to own the stock for the long term and not trade it with the hopes of capturing short-term gains. Cenovus is gradually positioning itself to become a top-tier turnaround candidate, and if oil prices continue upward, Cenovus could easily double over a very short period. However, it’s important that investors keep in mind that shares could continue to fall back into the single digits if oil prices fall back again.

Shares of CVE currently trade at a 5.45 price-to-earnings multiple, a 0.8 price-to-book multiple, a 0.8 price-to-sales multiple, and a 5.7 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.

You’re paying a rock-bottom price for a company that’s back on the right track. If you’re bullish on oil, I’d take a dollar cost averaging approach to accumulate a position over time to reduce risk.

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Fool contributor Joey Frenette has no position in any stocks mentioned.


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