Regardless of what we think about Canada’s oil and gas industry, Cenovus Inc. (TSX: CVE) has been a steady source of capital gains and dividend income for investors. This performance was mostly driven by rapidly rising oil and gas prices. But it was also driven by Cenovus’ solid operational and financial discipline. Is Cenovus stock still a buy after its first quarter 2023 earnings release?
Cenovus’ earnings hit by lower oil and gas prices
In the world of commodity prices, what goes up usually eventually comes down. This happens because of the forces of supply and demand, which work to “correct” the pricing mechanism. In the last year, this is exactly what has happened to oil and gas prices. Oil prices, for example, have fallen almost 30% since April 2022. Similarly, natural gas prices have fallen almost 70%.
As for Cenovus’ stock price, it has also understandably been volatile. But $120 oil was never sustainable. So, we should view oil prices in early 2022 as an anomaly. Therefore, we can also see Cenovus’ stock price at that time as unsustainable. With this perspective, we can see that CVE’s stock price has been steadily rising.
With this backdrop, let’s talk about Cenovus’ latest earnings report. Not surprisingly, revenue and earnings plummeted. In fact, revenue declined 20% to $14.2 billion, net income also fell 20%, and adjusted cash flow fell 46% to $1.4 billion.
The magnitude of this fall does seem alarming, I must say. Except when we take a step back and consider the bigger picture, the perspective is much better. At $70 oil, Cenovus still makes a healthy profit and cash flow margin. In the quarter, the company’s operating margin was 25% and its cash flow represented 20% of revenue.
A strong underlying business
It’s always a good time to re-assess a stock after earnings. You can think of it as a check-in. In Cenovus’ case, its latest earnings result reminds us of the company’s vulnerability to oil and gas prices. But it also reminds us that the company’s underlying business is strong.
For example, we’ve seen the benefits of an integrated business model time and time again. An integrated oil and gas company has the benefit of being involved in the upstream (exploration and production) business, as well as the downstream (refining) business. These two businesses have slightly different drivers, and owning the complete value chain taking oil and gas through to the refined product stage is valuable. This natural hedge brings efficiencies, control, and synergies.
Cenovus’ long-term outlook is solid
While its latest earnings result was weaker than many had hoped, the company is still driving toward completing its transformation into a top Canadian integrated energy company. With this, it’s also moving forward on its goal to be a top dividend-paying stock for investors. As such, management increased the dividend this quarter by 33% to $0.56 per share. Cenovus stock is now yielding a respectable 2.5%.
So, while Cenovus stock is not the undervalued underdog that it once was, it’s still undervalued relative to its peers, especially considering the quality of its assets and business.
