Cenovus Energy (TSX:CVE)(NYSE:CVE) has new management after acquiring ConocoPhillips‘ stake. Since this management took over, the corporation has undergone a long-term process of cost-cutting and expansion. This management isn’t slowing down.
This company’s industry is cyclical. The continued pursuit of bargain acquisitions and expansion should make Cenovus an excellent proposition for long-term investors as long as they comprehend cyclical sector volatility. Continued growth may cause “higher highs and higher lows” in the business cycle.
Cenovus Current Deals
Management just bought a refinery and is now the sole owner. This follows the purchase of 50% of Sunrise. Management mentioned a delay in reopening the Superior Refinery. This refinery has more refining capacity than was available when acquired. It also adds refining capacity when the US and Canada need it.
Small “add-on” deals involve less risk because Cenovus Energy knows the assets well. These are low-risk, high-reward bargains. Such assets have a limited market (usually to the other partner or partners). Any patient management can wait for “wanting-out” corporations to receive a good bargain.
In the above annual report, management consolidated results from the partnership with ConocoPhillips. Another collaboration refined the results. Management was “hog-tied” when anticipating the future because it needed partner approval for much (that includes receiving cash to pay the bills). This massive enterprise was bogged down in “required approval.” Management succeeded. It was far from satisfactory.
By 2021, cash flow surpassed any apparent share dilution. Long-term efforts to boost profits through efficiency were paying off.
The purchase of additional refining capacity in 2021 (when the market was approaching a cyclical trough) paid off handsomely in the current fiscal year. As the year progresses, expect more excellent news.
Thermal oil is discounted. The company’s market exposure led to terrible cash flow in 2021. The Husky (TSX:HSE)(OTCPK:HUSKF) acquisition makes that less plausible. Mr. Market wants to see how the parts do together. Demand should be easy to meet.
Management’s showing that this company “put together” through partnership buyouts, sales of non-core assets, and mergers or acquisitions will boost the stock. The company’s current record is short. Management doesn’t need to work hard to illustrate the benefits of recent company initiatives.
Current commodities prices have management “printing money.”
Since the ConocoPhillips partnership was bought, cash flow is so much higher than in 2016 that shareholders have profited from the management plan.
If second-quarter cash flow is annualized, the stock is three times cash flow. In a stock market that values free cash flow, that’s outrageously low. As illustrated above, well-run thermal enterprises produce much free cash flow.
This is a critical benefit in the current robust price environment because upstream thermal earnings are erratic. Thermal is cheap. During sluggish pricing, that discount can grow.
Additional refining capacity will reduce the requirement for upstream operations to sell a product at disadvantageous times. Now, much (if not all) of the output will improve business performance amid cyclical downturns.
Future performance may resemble Suncor Energy (TSX:SU)(NYSE:SU) and Imperial Oil (TSX:OIL)(NYSE:IMO). These two giants trade above much of Canada’s industries. As long as management manages Cenovus in line with market expectations, this is expected to happen to Cenovus” common shares in the future.
Plus, Cenovus Energy has lower upstream costs than the others.
Industry leaders’ increased upstream cost projection should boost the shares of Cenovus Energy, which has even better costs and will report a full year of refining and upgrading capacity.
Guidance for Cenovus Energy’s FY 2022
Upstream operations account for most integrated firms’ profits. Upstream costs dictate integrated organizations’ long-term performance.
Cenovus will be proportionally more profitable than established companies since it has lower upstream costs. As Husky refineries replace purchased or generated products with Cenovus upstream thermal products (and when the Superior Refinery comes online), the company’s profitability will increase more than established integrated competitors like Suncor. This could be another catalyst to boost the stock.
The integration gives cash flow during poor commodities prices. Suncor and Imperial were affected. Before 2021, Cenovus Energy had no cash flow.
Mr. Market is wary of a huge acquisition. Before buying Husky’s assets, the company had a refining relationship. This partnership should provide vital info. Upstream operations are a strong strength.
As the market recognizes the combined business will run successfully without remarkable management, this stock will rise. Cenovus’ upstream assets provide most of its income in a robust commodity price environment.
In addition to the upstream assets’ value is a powerful growth strategy. Cenovus has various advantages over its competitors. This company’s market value is usually eight times cash flow. That’s more than double the current valuation.
Featured Image: Megapixl @Piter2121
