Oil stocks have been doing surprisingly well in recent years. Over the last five years, the S&P/TSX Equal Weight Oil and Gas Index has risen 153%, considerably more than the TSX in the same period. The reasons for this strong performance are several. Oil prices have actually not been overly high these last few years, but a brief spike in WTI Crude prices in 2022 provided oil companies with windfall earnings, which they used to pay down their debts and improve their balance sheets. Since then, the oil giants have seen their revenue fall off somewhat, although earnings have been stable thanks largely to the aforementioned debt reduction.
In recent months, oil prices have been rising. With OPEC holding steady and demand still modestly rising, the fundamentals are in place for prices to continue rising at a modest pace. Nothing is ever guaranteed, of course: if the U.S. enters a recession, like recent economic data indicates it might, then oil prices will likely fall. However, long-term fundamentals remain in place. In this article, I share one Canadian oil stock that might be worth buying as oil prices rise.
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Cenovus Energy
Cenovus Energy (TSX: CVE) is a Canadian oil producer involved in exploration, production, refining, and natural gas. It used to have a gas station business, but it sold that business after being pressured by American ESG investors. The company is nevertheless pretty operationally diversified, with ways of making money in varying oil and gas industry conditions.
The main way that Cenovus makes money is by selling oil as a commodity to large buyers. This business tends to be lucrative when oil prices are high.
The company also makes money refining crude into marketable products such as gasoline. The profitability of this business does not depend on oil prices being higher, but rather, there being a sizable “spread” between oil prices and the prices of refined products (the “crack spread”).
Finally, the company produces natural gas at its three-million-acre portfolio in the Western Sedimentary Basin and sells it to end users such as utility companies. This business segment is based on different commodity price dynamics than the crude oil business.
So, Cenovus can thrive even when crude oil prices are not going anywhere.
Recent earnings
Cenovus Energy’s most recent earnings release was a major beat, with revenue $411 million ahead of estimates and earnings per share (EPS) $0.04 ahead of estimates. Some highlighted metrics included:
- $859 million in earnings, up 699% from the prior quarter (though down slightly year over year).
- $1.21 in adjusted funds flow per share, up 39% from the prior quarter and 1.6% from the year-ago quarter.
- Record production levels of both crude oil and natural gas.
The above metrics show that Cenvous performed reasonably well in the first quarter, despite oil prices having been fairly low in the period. In the current quarter, oil prices are considerably higher, so Cenovus’ earnings should be somewhat better in the upcoming release.
Valuation
Last but not least, Cenovus stock is currently modestly valued, trading at 11.8 times earnings, 0.71 times sales, 1.3 times book value, and 4.4 times operating cash flow. These metrics suggest that Cenovus stock may be worth the investment today.
The bottom line
The bottom line is that Cenovus stock is likely to do well if oil prices rise or even just stay where they are now. Personally, I would be comfortable having a sizable percentage of my money invested in it.
