Cenovus Energy (TSX: CVE) is up 50% from the low it hit during the April tariff rout. Investors who missed the rally are wondering if CVE stock is still undervalued and good to buy for energy exposure in a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio.
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Cenovus Energy share price
Cenovus trades above $22 per share at the time of writing compared to $15 earlier this year. The stock rose 8% in August. It hit a post-pandemic peak of around $30 in June 2022.
Cenovus operates oil sands, conventional heavy oil, offshore oil, and natural gas production operations. The company also has refineries.
Management has been busy in recent months positioning the business for long-term growth. In August, Cenovus announced a plan to buy MEG Energy for $7.9 billion, including debt. The deal would be 75% cash payment and 25% in Cenovus shares. Analysts broadly see the deal as a good fit, as the MEG Energy oil sands assets are located close to existing Cenovus operations. Cenovus expects to realize $150 million in short-term annual synergies and $400 million per year in synergies from the deal by 2028.
Cenovus just announced another transaction. The company is selling its 50% stake in WRB Refining to its partner, Phillips 66, for US$1.9 billion. Assets in the deal include the Wood River Refinery in Illinois and the Borger Refinery in Texas. The net refining throughput capacity for Cenovus at the sites works out to 247,500 barrels per day. Cenovus said it will use the proceeds to reduce debt and repurchase stock. The deal is expected to close in 2025. Investors reacted positively to the deal.
Risks
Strathcona Resources, which Cenovus beat in the bidding process for MEG, recently made another offer to try to undo the deal. This could force Cenovus to increase its bid, or the company could decide to walk away if it thinks the price is too high. The uncertainty could cause some volatility in the share price until there is clarity on the outcome.
Oil prices remain under pressure. West Texas Intermediate (WTI) sells for US$63 per barrel compared to US$80 last year. Analysts broadly expect the price of oil to face headwinds into 2026 as rising supply from major producers keeps the market in a surplus position. Demand from China and the United States, the two largest oil consumers, could weaken if tariffs and uncertainty on trade negotiations cause an economic downturn.
The sale of the stake in the U.S. refineries reduces revenue diversification at Cenovus. Adding MEG makes it more reliant on oil prices to determine revenue and profits. Refining assets can provide a nice hedge during times when oil prices are low. Reduced input costs for the refinery potentially lead to higher margins on the sale of the end products.
Time to buy Cenovus?
Near-term volatility should be expected, but energy bulls might want to start nibbling at this level and look to add on pullbacks. Acquiring MEG Energy should be a long-term positive for investors. Even without that deal, Cenovus has good growth prospects at its existing oil sands assets and has done a good job of reducing debt to enable the business to return excess cash to shareholders through dividends and share buybacks. The current dividend yield is a decent 3.5%.
