Cenovus Energy (TSX:CVE) stock had a transformative end to 2025. The $46 billion Canadian oil sands giant closed a massive $7.9 billion acquisition of MEG Energy in November and completed a debt offering to manage its maturing obligations. It was a busy season for deal-making. Just before the MEG deal closed, Cenovus sold its 50% stake in the WRB Refining LP joint venture to Phillips 66 for $1.8 billion in September. That sale was a crucial strategic move. It helped shore up the cash balances needed to pay out MEG shareholders.
The market has applauded these moves so far. Cenovus stock generated a solid 22% in total returns over the past year and has already gained 5.3% so far in this year. But as we look ahead, can this momentum continue throughout 2026?
Cenovus Energy stock’s new balance sheet reality
The biggest change for 2026 is the company’s leverage. The MEG acquisition was not free. Cenovus assumed $800 million in net debt from MEG and entered a $2.7 billion term loan facility to fund the transaction. Consequently, the combined entity’s net debt position should swell toward $10.8 billion.
Investors should be prepared to see this increased leverage on the balance sheet when the company releases its first earnings installment around February 19, 2026. This higher debt load is the primary reason the company has adjusted its immediate plans for shareholder returns. More on this below.
Production growth meets cost discipline
Despite the heavier debt load, Cenovus’s operational outlook is robust. The company plans to invest between $5 billion and $5.3 billion into its operations.
This budget is designed to support upstream production of 945,000 to 985,000 barrels of oil equivalent per day (BOE/d). Adjusted for the MEG acquisition, that represents a respectable 4% year-over-year production growth.
What is particularly impressive is the cost discipline. Management expects general and administrative costs to remain flat year-over-year at around $625 million to $675 million. Essentially, Cenovus plans to grow production organically and through acquisitions without bloating its administrative expenses. This indicates strong operating leverage. If oil prices cooperate, we could see significant expansion in operating margins in 2026.
However, the downstream refining business remains a “show me” story. The company projects a crude utilization rate of 91% to 95%. While decent, Cenovus has struggled to increase refinery productivity levels for some time, especially when compared to rivals like Suncor Energy, which has recently celebrated utilization rates of 100% or better.
Cenovus stock and the shareholder return reset
For income-focused investors, the 2026 outlook requires a slight adjustment in dividend growth and share repurchase expectations. To balance deleveraging with rewards, Cenovus targets returning 50% of excess free funds flow to shareholders in 2026. The remaining 50% will go toward whittling down that increased debt pile.
This is a significant reduction from the aggressive 100% return policy we saw in 2025, back when net debt was expected to stay near $4 billion. The path back to maximum returns is clear but will take time. Cenovus will increase returns to 75% of excess funds flow once net debt drops to between $6 billion and $4.5 billion. The “nirvana” state of 100% returns will resume only when the long-term net debt target of $4 billion is reached.
Will we see that $4 billion target in 2026? It’s highly unlikely. The current capital budget assumes a WTI oil price of US$60 per barrel. With WTI currently hovering around US$61.15, the company is generating better cash flow than budgeted, but the debt mountain is simply too large to clear in a single year.
A US$1 increase in oil prices (from the US$60 budget level) may add $220 million to Cenovus’s funds flow this year. Cenovus requires a strong oil price rally to accelerate its deleveraging efforts in 2026 and beyond.
Is Cenovus stock a buy?
Despite the debt, the energy stock’s value proposition is still compelling. Cenovus is accelerating cost synergies, expecting to recognize some of its MEG acquisition’s projected $150 million in savings earlier than the original 2026 target.
Trading at a forward price-to-earnings (P/E) ratio of 17.4 and a forward PEG ratio of 0.7, the stock appears undervalued relative to its future earnings growth potential. For new investors, the 3.3% dividend yield offers a decent waiting wage while management executes its deleveraging plan
