Cenovus Energy (CVE) is an oil-weighted exploration & production [E&P] company, producing about 165,000 barrels of oil equivalent [boe] per day from its Canadian Assets. Cenovus currently offers an interesting yield of 3.4%, which is below some of its closest peers, but has very good growth prospects. Cenovus has a market capitalization of about $19 billion and is traded on the Toronto and New York stock exchanges.
Cenovus is a Canadian integrated oil company currently employing about 5,000 people. Cenovus began independent operations on December 1, 2009, when Encana Corporation (ECA) split into two distinct companies: one an oil company (Cenovus), the other a natural gas company (Encana). Cenovus' operations include oil sands projects in northern Alberta and established natural gas and oil production in Alberta and Saskatchewan. None of its oil sands projects are mined, instead the company uses specialized techniques to drill and pump the oil to the surface. Its low-cost natural gas assets in southern Alberta provides strong cash flow to help fund its oil growth, and offset the cost of the natural gas the company consumes within its oil sands and refining operations.
Canada has the world's third largest oil reserves amounting to about 174 billion barrels of oil, 97% of which are in the oil sands. Cenovus has currently two producing projects in the Alberta oil sands - Foster Creek and Christina Lake - as well as several emerging projects which are in various stages of development. Cenovus has a 50% interest in its Foster Creek, Christina Lake and Narrows Lake oil sands assets, with ConocoPhillips (COP) holding the remaining stakes. It also have 50% ownership in two U.S. refineries, being its partner Philips 66 (PSX). The company also has two emerging projects, Grand Rapids and Telephone Lake, in the pilot stage, both of which are 100% owned by Cenovus.
Cenovus is one of Canada's largest oil producer with downstream assets that are starting to generate decent refining margins. While its upstream assets have some of the lowest costs in the industry, weak price realizations are a drag on its operating netbacks which have been relatively weak over the past few years. Its average netback for crude oil & NGLs is about $40 per barrel, which is below its peer group average. This is a negative factor, and its bitumen blends should continue to sell at a discount to other benchmarks, while its peers are more focused on international price realizations. Its interest in two downstream refineries is already mitigating some of the negative impact from rising prices differentials, and Cenovus continues to pursue a portfolio approach to getting its oil to market with a key focus on finding new customers in North America and overseas. This may provide options for sending oil to offshore markets where Cenovus could receive higher prices.
Financial Overview & Dividends
Regarding its financial performance, its revenues amounted to $15.1 billion in 2012 or an increase of 7.3% from the previous year. This increase was a result of higher oil production and refined product prices. Its EBITDA increased by 15% to $3.6 billion, achieving an EBITDA margin above 23%. Its net income was down by 30% to $892 due to non-cash asset impairments, which are non-recurring. During the first nine months of 2013, Cenovus growth remained robust with revenues up by 6% to $12.5 billion, due to higher crude oil sales and higher realized prices.
The company's 2014 guidance is for an oil production of 190,000-208,000 boe per day, cash flow from operations of between $2.7 billion and $3.3 billion, and capital expenditures [capex] of about $2.6 billion. Going forward, Cenovus' growth will rely on its oil sands assets, which support a 60% increase in production from about 250 boe per day to over 400,000 boe per day by 2017. This strong production increase bodes well for the company's earnings and cash flow growth, supporting a growing dividend over the next few years. Its long-term target is to produce about 500,000 boe per day in 2021, more than double its production level achieved in 2012.
Cenovus' dividend history has been quite good, since its inception in 2009 as a stand-alone company. Its annual dividend was raised twice over the past couple of years, up by 10% on each occasion. It currently pays a quarterly dividend of CAD 0.242 ($0.22), or an annual dividend of $0.97. At its current share price, Cenovus offers a dividend yield of 3.4%. Its dividend payout ratio is about 60%, which is an acceptable ratio given its growth prospects and relatively high profitability.
The company's dividend is amply covered by its good cash flow generation. Over the past three years, its operating cash flow was more than enough to finance its capex and dividend outflows. In 2012, Cenovus' operating cash flow was near $4 billion, while its capex amounted to $3.1 billion or more than 20% of its sales. This level of investment is quite high and is expected to continue over the next decade, as the company needs to invest heavily in its core oil sands growth projects, in addition to near-term investments at Pelican Lake and its conventional assets. Because of the weight of its oil sands portfolio, oil sands related investments will absorb a considerable portion of its invested capital, which tend to take two to four years before translating into bitumen production.
Therefore, Cenovus' capex should remain high over the next few years, even though its weight is expected to decline to about 17% of its sales over the next three years. This huge cash outflows expected in the medium to long-term constrain large dividend increases, so Cenovus is not expected to become a high-dividend play like some of its closest peers, such as Canadian Oil Sands (OTCQX:COSWF). Nevertheless, its dividend seems sustainable from a cash flow perspective and is supported by the company's relatively unlevered balance sheet. Cenovus' net debt amounted to $3.4 billion, representing a net debt-to-EBITDA ratio of only 0.95x. The company's capital investment is expected to be primarily internally funded from its cash flow generated from operating activities, so Cenovus balance sheet should remain strong despite its huge investments ahead.
Cenovus significant oil sands assets should support a growing production over the next few years, which will be reflected in higher earnings and cash flow allowing the company to deliver a sustainable and growing dividend. Although there are higher dividend yields within the oil industry, Cenovus has above average growth prospects, making it appealing to both income and dividend-growth investors. The main risk for Cenovus' dividend is a sustained drop in oil prices, which would lead to lower cash flows and could hamper its growth plans.