While 2022 was a rough year for most investors, energy stocks outpaced the broader markets by a wide margin due to high oil prices. After accounting for dividends, the energy sector in the U.S. has surged by 45% in the last 12 months. Comparatively, the S&P 500 index has been down 14% since January 2022.
Propelled by higher oil prices, energy companies reported record profits in the last four quarters. Several players in the energy sector used additional cash flows to lower debt, increase dividends or buybacks, and strengthen balance sheets.
One such TSX stock that gained close to 40% in the past year is Cenovus (TSX: CVE). While it crushed market returns in 2022, let’s see if CVE stock is a buy right now.
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Is Cenovus stock a buy, sell, or hold?
Valued at a market cap of $48 billion, Cenovus is among the largest companies on the TSX. The Calgary-based integrated energy company operates high-quality, low-cost oil sands, as well as heavy oil assets with midstream and downstream infrastructure.
In the favourable macro environment in 2022, Cenovus generated incremental cash flows. These excess funds will be used to lower net debt to $4 billion by the end of Q4 of 2022, resulting in credit rating upgrades.
Cenovus tripled its dividend per share in 2022 to $0.46 per year, offering shareholders a forward yield of 1.9%. It also declared variable dividend payments to meet return commitments to shareholders.
The energy giant executed on strategic acquisitions and divestitures, providing it with the required financial flexibility to service debt and other obligations.
In 2023, Cenovus has allocated between $4 billion and $4.5 billion towards capital expenditures, an increase of 21% year over year. Its upstream production might increase to between 800-40 MBOE/D (thousand barrels of oil equivalent per day), up 3% compared to 2022. Comparatively, downstream throughput might surge by 28% year over year.
This year, Cenovus expects to generate free funds flow across price cycles. Its investments should help the company deliver cost of capital returns at US$45 for the West Texas Intermediate. Moreover, Cenovus expects significant free funds flow at US$80 WTI prices. These cash streams will result in robust shareholder returns. Management is targeting 100% of excess free funds flow to shareholders when net debt is lowered to $4 billion.
What next for CVE stock price?
Priced at 7.2 times forward earnings, CVE stock is quite cheap. Analysts tracking the stock expect shares to gain more than 30% in the next 12 months. In other words, CVE is positioned to outpace the broader markets for the second consecutive year.
But investors should understand that energy stocks are extremely cyclical, and they generally trail major indices by a wide margin during times of economic contraction. So, in the case recession fears come true, oil prices have a good chance of moving lower, resulting in narrower profit margins for CVE and its peers.
While Cenovus has more than doubled shareholder returns in the last five years, its dividend-adjusted gains since January 2013 stand at -4.6%. So, you should invest in CVE stock only if you are confident that oil prices will maintain momentum in 2023 and beyond.
