Oil & gas is one of the most prolific industries, investment-wise, despite the cyclical nature of the business, volatility, and uncertainty. The evidence is the representation of these resource companies in the flagship program of Canada’s top growth stocks. From 2022 to 2024, oil & gas stocks account for at least half, if not more than half, of the TSX30 winners.
Many of the winners in the last three years were small-cap energy stocks. However, this year, a top integrated oil & gas company made the list. Cenovus Energy (TSX:CVE), ranked 23rd among 30 Canadian domestic stocks. The Calgary-based firm is an expert in extracting oil from oil sands and is known for utilizing innovative technologies to maximize production efficiency.
Stock performance
On the day of the announcement on September 10, 2024, CVE’s three-year dividend-adjusted share price performance is +141%. The $39.33 billion company operates in Western Canada, where its assets and conventional oil and natural gas operations provide short-cycle development opportunities and boast high-return potential.
According to management, oil sands development is the perfect complement. It is long-term and serves as an economic hedge for natural gas at the oil sands and refining operations. Cenovus Energy operates natural gas facilities in west-central Alberta, producing natural gas and liquids offshore in China and Indonesia.
Earn two ways
Besides the capital gains from price appreciation, prospective investors can earn passive income. If you invest today, the large-cap energy stock trades at $21.42 per share and pays a 3.34% dividend. The uninterrupted dividend track record is 13 years and counting.
Given the low 38.94% payout ratio, the quarterly payouts should be safe and sustainable and can compensate for price drops. CVE also carries a “buy” to “strong buy” rating from market analysts. Their 12-month average price target is $31.53, a 47.2% potential upside. Its 52-week high is $29.96.
The integrated portfolio and geographic diversification are competitive advantages because they provide diverse cash flow streams. It allows management to allocate 100% of excess free funds flow to shareholder returns. The annual base dividend could also grow by double-digit by 2028 ($2 billion growth capacity).
Financial performance
For the first three quarters of 2024 (nine months ending September 30, 2024, net earnings declined 11% year over year to $2.99 billion due to lower sales volume and operating margin. However, Cenovus reduced its net debt by 29.8% to $4.2 billion from a year ago.
In the third quarter (Q3) 2024, net earnings dropped 56% to $820 million versus Q3 2023. Still, Cenovus president and chief executive officer Jon Mckenzie said it was a solid operating quarter despite significant volatility, declining crude oil prices, and higher maintenance costs. More importantly, Cenovus returned $329 million in base dividends to shareholders and repurchased $732 million worth of shares.
Business outlook
Cenovus Energy is a screaming buy today for its relatively low price and temporary weakness. Expect the TSX30 winner to rise because of a strong balance sheet and low-risk debt maturity profile. “With planned upstream and downstream maintenance activities behind us, we’re well positioned to deliver strong operations for the balance of the year and into 2025,” said McKenzie.
