- Cenovus is a Canadian integrated gas and oil company based in Calgary.
- If companies producing oil were to disappear from the world, life would come to a standstill.
- Not only are investors not yet very much invested into the sector but they haven’t even begun to think about it much yet.
- We consider Cenovus Energy shares to be undervalued.
The following segment was excerpted from this fund letter .
Cenovus Energy ( CVE )
We bought shares in Cenovus Energy ( CVE ). This marks the first time in 10 years that an oil producing company has appeared in the Vltava Fund portfolio. Cenovus is a Canadian integrated gas and oil company based in Calgary. It is Canada’s third-largest producer of crude oil and natural gas, the country’s second largest refiner, and it combines high-quality and low-cost assets in the oil sands segment and heavy oil with extensive downstream infrastructure.
Investment in this sector is not at all easy. It is a cyclical industry where it is not easy to build a competitive advantage. The investment horizons are long and companies often work with large debt. Many companies face problems creating sufficient free cash flow in the long term. Our experience leads us to the view that it is necessary to give preference to companies that already today are producing at high levels so that they immediately can take advantage of the strong oil prices and need not rely on capacity that will be brought online only in the future. Such a company should have reasonable operating costs, low debt, and very long-term reserves the development of which need not swallow up all the profits that are generated. In our opinion, Cenovus Energy offers all of this and it also has a very shareholder-friendly capital allocation.
But isn’t it already too late for this investment? Certainly, it would have been better had we purchased Cenovus perhaps a year earlier. Everything is clearer in hindsight, of course, but we needed some time to come to the conclusion as described above. We are aware that we could be mistaken in our analysis, but we do not think the time is late for this investment.
The entire oil and gas sector has a smaller representation in the S&P 500 Index than does Apple alone. Apple is an excellent company, we admire its products, and we also hold its shares through our investment in Berkshire Hathaway ( BRK.A , BRK.B ). At the same time, though, I must acknowledge that if Apple were to disappear from the world tomorrow not much would happen. Life would go on as normal. If, however, companies producing for oil were to disappear from the world, life would come to a standstill.
That doesn’t make much sense. Not only are investors not yet very much invested into the sector but they haven’t even begun to think about it much yet. During June I was at two rather large investment conferences, in Madrid and in Zurich. In Madrid, I listened to 17 presentations of individual equity investment opportunities and only one of them had to do with oil exploration and production. In Zurich, there were about 50 of us investors from all over the world and during the course of 3 days many interesting topics were discussed, but oil exploration and production did not even come up. No, this is not a leading topic of interest among investors at the moment.
Even the term structure of oil futures prices reflects this. It is downward sloping and shows that the market anticipates gradually declining oil prices. I think that reflects a sort of majority opinion. Nevertheless, I think that the market is confused on this. I know that is a bold assertion, but such would not be anything unusual. A year ago, that same term structure anticipated that the price of crude today would be around USD 65–70. It is at USD 110. Last year in summer the futures pricing also forecast that at the end of 2024 oil would be at USD 55. Today it already predicts USD 76. Gradually, it is pushing upwards, but still it remains too low. When analysts value oil companies, they generally take the expected oil prices as their starting point. The Cenovus Energy share price itself today implicitly assumes that the oil price will decline in the near and medium term future. We do not think so, and therefore we consider the shares to be undervalued.
We do not enjoy high energy prices any more than we find joy in high inflation. Inflation is in fact a form of hidden taxation – both of property and of income. One of the small things that we can do from that point of view is to adapt some of our investments to that reality. So, the next time you will be at the petrol station and pay a new record price for fuel, you can take some small comfort in the fact that you own an investment that may compensate you in part for that higher cost.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
For further details see:
Vltava Fund - Cenovus Energy: High-Quality And Low-Cost Assets