What a difference a year makes. Last summer, Canadian energy stocks seemed invincible. Oil and gas giants like Cenovus Energy (TSX:CVE) saw unprecedented windfalls that pushed their market value and bottom line higher.
However, the stock has now lost more than a third (35%) of its value since June 2022. Commodity markets are shaky and investors are unsure about the path ahead. Is it time for investors to double down or give up? Here’s a closer look.
Energy prices
Last year, most analysts and investors were expecting an energy supply crunch triggered by the war in Ukraine. With sanctions on its key energy supplier, Europe was expected to face an energy crisis, which is why crude oil and natural gas prices surged.
However, this energy crisis did not materialize. Europe moved faster than expected to secure gas supplies while winter 2022 was milder than anticipated. Meanwhile, North American producers moved even faster to add supply for exports, which pushed prices lower.
The price of a million British thermal units (Btu) of natural gas was roughly US$8.80 in August 2022 and is now just US$2.10. The Energy Information Administration (EIA) sees an average price of $3.02 per MMBtu this year. The agency also sees stagnant crude oil prices for the year ahead.
Energy outlook
Long-term investors need to consider the demand for energy. This year, energy demand is likely to be lower due to the impending recession. Signs of a global recession are already emerging with the growth slowdown in China, banking crisis in America, and consumer pessimism in Canada.
A recession in 2023 will push energy demand lower. But the long-term outlook isn’t much better. The transition to greener fuels is accelerating. Almost all countries will generate more energy from renewable sources by the end of this decade. By 2030, green energy will account for over one-third of total energy in several European countries including France, Ireland, and Germany.
That’s bad for oil and gas producers like Cenovus.
Cenovus valuation
Cenovus stock is arguably cheap, trading at just 8.9 times earnings per share.Analysts expect the company to deliver $3.05 in earnings per share in FY2024. Based on that estimate, the stock is currently trading at a forward price-to-earnings ratio of 5.25 – or an earnings yield of 19%!
Management has promised to deliver more of its excess free cash flow back to shareholders if debt remains under its target. In recent quarters, the company’s debt-to-equity ratio has been below 40%, which means investors could see higher dividends and buybacks in 2023.
Cenovus is unbelievably cheap. It could be an ideal pick for investors seeking passive income in the medium-term. However, if natural gas prices plummet or stay lower for longer than expected Cenovus could prove to be a value trap for investors.
Nevertheless, this isn’t the right time to give up on the stock.
