As far as energy stocks go, Cenovus (TSX: CVE) has been one of the many winners. In fact, it’s really been an outperformer in its sector, rising almost 104% in the last five years. This compares to a 2% decline in the stock prices of its peers in the integrated energy sub-sector. In November, Cenovus’s stock price dipped 3%.
After its long and successful run, this may have some of us wondering if CVE stock on the TSX is still a buy today. Let’s look into this.
Cenovus’s transformation
After surviving the long downturn in the oil and gas industry, Husky Energy is thriving today. This is in large part due to the bold moves the company made at the height of the downturn. It’s also due to the exceptional operational standards and financial stewardship that Husky has a long history of as well as its quality asset base.
As an example of the type of moves I’m referring to, we need look no further than the moves that the company made when the oil and gas industry was at the depths of despair. This was facilitated by two factors. First of all, they had the resources, because they managed the company and its finances really well. But also, they had the foresight, the conviction, and the courage to act when things were at their bleakest. I mean, the general consensus was that there was little hope for the sector a few years back.
So, first of all, Cenovus bought ConocoPhillips’s oil sands and Canadian natural gas assets in March 2017. At that time, oil prices were trading in the high $40’s. Also, the sentiment on the sector was highly negative. As time advanced, the situation grew even more dire. By 2020, oil traded at an average price of $49. In April 2020, it actually slumped into negative territory. The environment was tense.
Yet in January 2021, Cenovus made another acquisition. This time they bought integrated Husky Energy, giving Cenovus access to the very profitable refining business at bargain prices. In fact, Chief Executive Officer Alex Pourbais said that Cenovus acquired Husky at a “once-in-a-generation valuation.” I agree.
This is the way to create long-term shareholder value — acquiring companies when they’re trading at cyclical lows, or “once-in-a-generation” valuations.
More opportunities coming from the Husky takeover
At the time of the Husky acquisition, Cenovus estimated that the synergies they could achieve would exceed an annual run rate of $1.2 billion. Today, Cenovus is tracking above this, as the company applies its operating practices to the acquired assets.
Furthermore, there remains plenty of opportunity to further drive production efficiencies at the acquired assets. Basically, there’s a lot of low-hanging fruit to be had. It’s the result of a lack of investment in production during the difficult years in the industry. Therefore, Husky will continue to add production with minimal capital investment.
Windfall coming from Cenovus
The combination of buying assets at depressed valuations as well as having the expertise to make improvements and extract synergies has created a perfect storm for Cenovus. In its latest quarter, the third quarter of 2022, the company generated funds flow of $3 billion and free funds flow of $2.1 billion. After debt repayment, the company was left with excess cash flow of a whopping $1.8 billion.
So far in 2022, Cenovus has reduced its net debt by $4.3 billion. It currently stands at $7.8 billion. According to the company, net debt will hit its targeted level of $4 billion before the end of the year.
This is relevant, as it will signal a shift at the company. At this point, excess free funds flow (which is operating funds flow minus capital expenditures) will be 100% directed toward shareholders. The payout will include increases in the regular dividend, share buybacks when Cenovus Energy’s stock price is around the $20 level on the TSX, and special dividends when CVE stock is around the $30 level.
