CVE:CC - Cenovus Stock Is Rising but I'm Worried About This One Thing
2024-04-30 19:00:00 ET
Cenovus Energy ( TSX:CVE ) stock has risen rapidly in price this year. Starting the year at $22.10 and closing at $29.43 on Monday, it’s up 33% year to date. It has been an impressive showing. However, Cenovus Energy is not necessarily a perfect Canadian energy stock – it is subject to certain risk factors.
The problem is that Cenovus Energy sold its Husky Energy gas station business when it came under pressure from ESG investors in 2022. The business was a profitable one for Cenvous, but investors seem to have convinced the firm that continuing to operate gas stations would adversely impact its image, and thereby impede its ability to attract investment. At the time, gas stations were quite unpopular, as they were seen as contributing to climate change far more than other oil/gas operations such as natural gas did. CVE’s management bought the argument and promptly sold Husky Energy to Parkland Fuel.
Lack of diversification
The problem with Cenovus’ decision to sell off Husky Energy is that it left the company with little operational diversification. “Operational diversification” refers to a company having multiple lines of business; it’s similar to portfolio diversification, only internal to a company. Operational diversification is a good thing because it gives a company a hope of prospering when one line of business isn’t doing well.
There are many different sub-sectors within the energy business – natural gas utilities, midstream/transportation, exploration and production (“E&P”), gas stations, and refining. Before it sold off Husky Energy, Cenovus was involved in three of these (E&P, gas stations, and refining). Today, it is only involved in E&P and refining. This is a loss because gas stations are a very good form of operational diversification for oil companies. They profit off the “crack spread” (difference between the prices of oil and refined products) much like refineries do, but on top of that, they also make money selling completely unrelated goods like food, lotto tickets, and cigarettes. Husky no longer has this revenue stream, so now it depends on high oil prices much more than it did previously.
Recent earnings
Cenovus Energy’s recent earnings haven’t been as good as those seen in the oil bull market of 2022. We are in another oil bull market today, but we haven’t seen an earnings release from Cenovus since it began. I expect earnings will be pretty good when they come out tomorrow. Last quarter’s headline numbers were:
- $2.9 billion in cash from operations, unchanged year over year.
- $2.1 billion in adjusted funds flow, down 15%.
- $892 million in free funds flow, down 16.7%.
- $743 million in net income, down 5.2%.
- $0.39 in diluted earnings per share (EPS), unchanged.
Overall, it was an alright showing. Suncor Energy in the same period posted a much more severe decline in net income. With that said, most cash flow metrics did decline on a year-over-year basis. So, Cenovus has plenty of improving to do.
Valuation
One thing Cenovus Energy definitely has going for it is a cheap valuation . At today’s price, it trades at:
- 13 times earnings.
- 1 times sales.
- 1.8 times book value.
- 7 times operating cash flow.
This looks fairly cheap compared to North American equities as a whole, and will eventually prove to have been cheap if oil prices hold their current levels long term.
The post Cenovus Stock Is Rising, but I’m Worried About This One Thing appeared first on The Motley Fool Canada .
Fool contributor Andrew Button has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .
2024