It’s no secret that oil and gas stocks like Cenovus Energy (TSX: CVE) suffer from negative investor perception. But it wasn’t always like this. And it doesn’t have to be like this forever either. Because these companies are cleaning up their acts, and their businesses continue to be fundamentally strong.
Let’s take at Cenovus Energy stock to see why it is worth considering.
Cenovus is not the company it once was
This is true both from an environmental perspective and a business perspective. Let’s tackle the environment first. Today, Cenovus has a whole section of its website devoted to its commitment to the environment. Whether this is a function of economic necessity or a moral position, the fact is that the company is investing in reducing its environmental impact.
Actually, the whole oil and gas industry is doing the same. And this is a big change. It was a gradual change, and you might think it’s a little late. But I remember years ago, when the oil and gas industry took the position that climate change was not a thing and that they were doing no harm … better late than never.
Cenovus has stated that decarbonization is now a part of its business plan. As such, the company is embracing its target for net zero emissions by 2050. To this end, in 2022, greenhouse gas emissions were 8% lower than 2019 levels. By 2035, the company is targeting greenhouse gas emissions to be 35% lower. Investments into carbon capture and emissions reduction technologies will move Cenovus closer to its goals.
This should go a long way in improving investor sentiment toward Cenovus stock, and the oil and gas industry in general. Aligning financial goals with caring for the earth and the people in it is just a win-win situation for all.
Financial results
The price of oil is hovering around US$70 at this time. Let’s be clear, this price level is a very lucrative one for companies like Cenovus. Keep in mind, the company’s break-even oil price is approximately US$40. In fact, the first quarter of 2023 is evidence of this. Adjusted funds flow totaled $1.4 billion, and earnings per share came in at $0.71. Also, the company’s operating margin was 25% and its cash flow represented 20% of revenue.
But these results are not even Cenovus at the top of its game. In fact, Cenovus was hit by the restart costs of two of its refineries: Superior and Toledo. Also, some of its other refineries didn’t run at full capacity. Looking ahead into the second quarter and the rest of the year, the market is expected to be strong for refined products. Cenovus continues to build its utilization rates to be able to fully benefit from this.
Cenovus Energy’s stock price has come under pressure lately along with the decline in the price of oil. However, in the long run, its integrated business stands to benefit, even if oil prices remain around today’s levels. It’s a very profitable business that should benefit Cenovus’s stock price in the long run.
Finally, as a result of Cenovus ramping up its transformation into an integrated business, we can look forward to improved profitability and cash flows that come with it.
Motley Fool: The bottom line
If we’re realistic, we know that oil and gas will continue to be a key energy source for years to come. Cenovus is a top performer that continues to trade at a discount, especially considering the high returns that this business generates.
