CVE - Cenovus Energy: Several Catalysts Could Soon Unlock The Value

2024-04-09 12:24:38 ET

Summary

• Cenovus is a high-margin integrated oil company with dividends covered even with US$45-WTI.
• The company is about to switch to a 100% payout ratio, which could force the market to pay more for the stock.
• With a current stock price of C$29 and oil prices at $80-WTI, the dividend+buyback yield could reach 15% by 2025.
• Despite the high payout, the company still generates cash flow to support planned 4% yearly production output growth.
• Even if an aggressive 15% discount rate is applied, the shares are worth C$36/US$26, 25% higher compared to the current price.

Investment Thesis

OPEC+ with Russia are cutting oil output, geopolitical tensions in the Middle East are not getting better, and the outlook for US shale oil output has worsened. All these factors, together with high demand, are causing oil prices to rise, with J.P. Morgan calling for a potential $100 oil. With upper-cycle oil prices, one has to be cautious not to overpay for oil producers. Arguably, many Canadian O&G companies remain cheap and are valued as if oil is trading in the high sixties to low seventies.

One such company is Cenovus Energy Inc. ( CVE:CA ), ( CVE ). A low-cost producer that is on the way to achieving its debt target and switching to 100% of FCF paid out to shareholders via dividends and buybacks. We all saw the beautiful run in the stock price of Canadian Natural Resources Limited (CNQ) ( CNQ:CA ) when it was approaching the 100% payout ratio. As Canadians love their 0% taxed dividends and are willing to pay a premium for them, it makes a case for Cenovus, which is still on the run-up to 100% payout....

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