Generally, energy stocks are cyclical and trail the broader markets over time. One such TSX energy stock is Cenovus Energy (TSX:CVE), which is valued at $42 billion by market cap. CVE stock has burnt massive investor wealth in the past decade, as it has declined 13% since December 2013, even after adjusting for dividends. Comparatively, the TSX index has gained 115% in this period.
Down 36% from all-time highs, CVE stock currently offers shareholders a dividend yield of 2.5%. Let’s see if this TSX oil stock should be part of your equity portfolio right now.
An overview of Cenovus Energy stock
An integrated oil and natural gas company, Cenovus has operations in Canada, the U.S., and Asia Pacific. It operates across the oil and natural gas value chain, including exploration, production, refining, retail, and transportation.
In early 2021, Cenovus Energy acquired Husky Energy, one of Canada’s largest integrated oil and natural gas producers. The combined entity is now the second-largest oil and natural gas producer in Canada and the second-largest Canadian refiner and upgrader.
Over the years, Cenovus has successfully integrated high-quality and low-cost oil sands and heavy oil assets with midstream and downstream infrastructure.
How did Cenovus perform in Q3 of 2023?
After reporting record profits in 2022, energy stocks have cooled off this year due to lower oil prices, sluggish consumer spending, and an uncertain macroeconomy. Investors are also worried about the debt-heavy balance sheets of Cenovus due to rising interest costs, which might lead to an erosion of profit margins.
However, in the third quarter (Q3) of 2023, Cenovus generated an operating cash flow of $2.7 billion, adjusted funds flow of $3.4 billion, and free funds flow of $2.4 billion.
Due to strong operating performance and a supportive commodity pricing environment, Cenovus increased cash flow and revenue on a sequential basis in Q3, allowing it to return $1.2 billion to shareholders via buybacks and dividends.
The energy giant also reduced long-term debt by $1 billion in the quarter, ending Q3 with net debt of $6 billion.
Its results in Q3 improved compared to the June quarter due to higher price realizations in the Oil Sands segment, primarily driven by narrower light-heavy crude oil differentials, an increase in refined product pricing, and higher refined product volumes in the downstream business.
It invested $1 billion in capital expenditures in the September quarter in the Oil Sands business and infrastructure projects, which should drive future cash flows higher.
What is the target price for CVE stock?
Cenovus is using its excess cash flows to reinvest in growth projects, lower its balance sheet debt, and pay shareholders a dividend. It currently pays an annual dividend of $0.56 per share, and these payouts have almost tripled in the last seven years. However, Cenovus Energy was forced to cut its dividends by over 40% in 2015, as oil prices fell significantly.
Currently, Cenovus Energy aims to return 50% of excess free funds flow to shareholders if its net debt remains below $9 billion.
Priced at nine times forward earnings, CVE stock is quite cheap and trades at a discount of 50% to consensus price target estimates.
