The recovery in oil prices has investors kicking the tires on Canada’s oil sands producers.
Imperial Oil generated $1 billion in cash flow from operations in Q2 2018 and reported net income of $516 million.
The company operates conventional oil and oil sands production facilities as well as refineries and a retail division. Production came in at 370,000 barrels per day (bbls/d), which was a bit lower than the results for the same period last year, but the downstream assets and chemical businesses made up for it by taking advantage of strong margins.
Imperial Oil recently raised the quarterly dividend by nearly 20% to $0.19 per share and amended its share-buyback program to increase the number of shares the company can repurchase.
An investor who bought Imperial Oil 20 years would have paid about $8 per share. Today, the stock trades for close to $44. The shares bounced around in a range of $30-60 over the past decade and have increased 30% since late March.
Imperial Oil is majority-owned by U.S. giant ExxonMobil. The backing of the parent company should ensure financial support in the event the oil market hits another speed bump, but Imperial Oil’s management team probably has less flexibility than its peers when it comes to making new investment decisions.
Cenovus made a big move last year when it spent $17.7 billion to buy out it 50% partner, ConocoPhillips, on its oil sands operations. The deal instantly doubled the company’s production and resource base, and also came with important assets in the Deep Basin plays in Alberta and British Columbia.
Unfortunately, oil prices were on the slide at the time, and Cenovus decided to hedge most of its production through the first half of 2018 at prices that have turned out to be much lower than the company would have received in the open market. As a result, Cenovus has not benefited from the rally that occurred in the back half of 2017 and into this year.
This resulted in risk-management losses of $469 million in Q1 2018.
Looking ahead, the situation should be better. Hedges only account for 37% of production in the second half of 2018, and the sharp rebound in Western Canadian Select (WCS) prices should mean Cenovus will see much better cash flow. WCS has bounced from US$30 in March to above US$50 per barrel.
Cenovus was hit hard by the oil downturn and negative market reaction to the 2017 asset purchases. The stock traded above $34 per share four years ago. Today, investors can pick it up for less than $14, and that’s after a 50% rally off the March low.
The company slashed the dividend during the downturn, but investors could see the payout begin to rise again if oil can maintain its gains.
Is one more attractive?
Both stocks should do well as oil prices recover. Imperial Oil is likely the safer pick, but Cenovus probably offers better upside potential, given the extent of the crash and the fact that the company still remains out of favour with the market. If you have a contrarian investing style, Cenovus might be the way to go today.
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 Andrew Walker has no position in any stock mentioned.