Energy investors are having a blast after oil and gas names have seen rapid growth this year. We are nearing the halfway mark into 2022, and some TSX energy stocks have already doubled. Canadian energy bigwig Cenovus Energy (TSX:CVE)(NYSE:CVE) has returned 95% so far, standing tall among its peers. Interestingly, considering its balance sheet strength and supportive macro scenario, it is positioned well for further growth, too.
What’s next for CVE stock?
The energy sector has been in a sweet spot since the pandemic. Notably, Canadian names have rallied more than their U.S. counterparts, mainly because of their relative undervaluation.
Energy names have almost always lagged markets before the pandemic. Investors disdained oil and gas stocks due to massive value erosion. However, things changed upside down after mid-2020, as oil and gas prices rose, thanks to higher demand and flattened supply.
Importantly, oil-producing companies maintained a strict capital discipline in this commodity upcycle. They used excess free cash flows for debt repayments and not to substantially increase production. As a result, along with profitability, the financial health of the overall energy sector significantly improved.
Financial growth and balance sheet strength
Cenovus Energy has been no exception. Its net profit in Q1 2022 jumped by nearly eight times compared to the same quarter last year. In addition, free cash flows increased to $1.8 billion during the quarter against $594 million in Q1 2021.
Cenovus Energy aggressively repaid the debt due to surging free cash flows, which lightened its balance sheet in the last few quarters. Its net debt was around $13.3 billion in Q1 2021, which came down to $8.4 billion at the end of Q1 2022. Note that lowering debt means lower interest expenses and improved profitability.
Another important thing to note is crude oil has been trading well above US$100 a barrel in the current quarter. Energy companies reaped significant benefits when oil averaged around US$90 during the first quarter. So, their second-quarter results will rather be superior compared to Q1 2022, driving TSX energy stocks even higher.
Cenovus Energy dividends
After reporting solid quarterly performance in Q1, Cenovus increased shareholder dividends three-fold. It will now pay a dividend of $0.42 per share annually, implying an annualized yield of 1.6%.
Though the yield looks trivial, the hike underlines the sweet spot Cenovus is in. It also conveys management’s confidence in its future earnings growth and balance sheet vigour. In addition, investors will likely see more such dividend growth, given the current oil price strength. Cenovus even clarified during its Q1 earnings that it would allocate 100% of its free cash flows to shareholder returns once it reaches a net debt target of $4 billion.
Even after doubling in 2022, Cenovus Energy does not look less appealing. The current oil price rally has brought energy producers a very fundamental change — the balance sheet strength — which none of the earlier rallies did. So, TSX energy stocks, including Cenovus Energy, will likely continue to create meaningful shareholder value, at least in 2022.