Buy-recommended Cenovus Energy (CVE) offers unlevered appreciation potential of 9% to a McDep Ratio of 1.0 where stock price would equal Net Present Value (NPV) of US$27 a share. Fourth quarter results, released on February 11, support our estimate for unlevered cash flow (Ebitda) in 2010. Cenovus has been operating as an independent company since separation from buy-recommended Encana (ECA) on November 30, 2009. The new entity has the ambitious target to quadruple bitumen (heavy oil) production by 2017.
Cash flow from natural gas and other oil reserves in Canada would finance the development. In a 50/50 joint venture with buy-recommended ConocoPhillips (COP), the heavy oil would be refined in the U.S. into gasoline, diesel and other final products. Reserves to support perhaps half of bitumen growth to 2017 appear counted as proven. Reserve life and projected cash flow support NPV in an industry context. Future conversion of undeveloped reserves to developed and unproven resources to proven reserves promise growth in NPV.
We also believe oil price has long-term appreciation prospects. Meanwhile, current futures prices for delivery over the next six years settled at $83 a barrel on February 12, above the 40-week average of $82.
Originally published on February 15, 2010.