Why Cenovus Energy (TSX:CVE) Stock Doubled in 2022

CVE stock has rallied from close to $3 levels during the pandemic crash to $30 today.

| More on:
energy industry

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

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.

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.

The Motley Fool has no position in any of the stocks mentioned. Fool contributor Vineet Kulkarni has no position in any of the stocks mentioned.

More on Dividend Stocks

money cash dividends
Dividend Stocks

TFSA Passive Income: 2 Top TSX Dividend Stocks to Buy on the Correction

These top dividend stocks look cheap to buy right now for a TFSA focused on passive income.

Read more »

Target. Stand out from the crowd
Dividend Stocks

2 Oversold TSX Stocks to Buy in July

Invests can now find good value right now in top TSX dividend stocks.

Read more »

You Should Know This
Dividend Stocks

OSFI: Mortgage Arrears Only 0.15% Despite Rate Hikes

The OSFI is happy with the low mortgage delinquency but remains worried over the impact of rising rates on Canadian…

Read more »

Female hand holding piggy bank. Save money and financial investment
Dividend Stocks

2 Great TSX Stocks to Start a TFSA Retirement Fund During a Market Correction

These top TSX dividend stocks look cheap right now to buy for a TFSA retirement portfolio focused on passive income…

Read more »

consider the options
Dividend Stocks

Recession Worries? Try Buying These 2 Stocks

Consider investing in these two safe dividend stocks if you are worried about your investment returns due to fears of…

Read more »

A close up image of Canadian $20 Dollar bills
Dividend Stocks

TFSA Investors: Should You Be Holding Cash Now?

Holding cash might not be the best option for TFSA investors in 2022, but using surplus cash to purchase dividend…

Read more »

stock market
Dividend Stocks

4 Dividend Stocks With Yields of at Least 5% in a Bearish Market

By investing in these stocks, investors can earn reliable dividend yield of 5% or more.

Read more »

Path to retirement
Dividend Stocks

Retirement Investors: 2 Top Defensive TSX Stocks to Own During a Recession

These top defensive TSX dividend stocks look good to buy for a retirement fund during an economic downturn.

Read more »