Cenovus Energy Should Soar Once Oil Recovers

| About: Cenovus Energy, (CVE)
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Cenovus cutting expenses to survive in a low oil price environment.

CVE may be acquired in 2016.

Wonderful downstream projects and sustainable balance sheet.

The company has limited downside from the current levels as oil has found a bottom.

Cenovus Energy (NYSE:CVE) is a Canadian integrated oil company that has been hit hard by the collapse in oil prices as the stock has tanked -58% from its high in August 2014. In the latter part of 2015, Cenovus released the capital budget for 2016, which shows how the company is going to survive in a low oil price environment and set itself up to soar once oil prices do recover. The dividend got reduced last year to a more sustainable level due to the decrease in cash flow and a stressed balance sheet due to the decline in oil. Cenovus has become a very attractive takeover target as it has wonderful assets in its Foster Creek and Christina Lake oil sand projects. Cenovus will survive this difficult environment and will soar once oil recovers later this year. Gutsy investors who aren't afraid of volatility can profit from the collapse in oil and be rewarded by betting on great oil stocks like CVE.

Cenovus to cut capital spending in order to survive

Cenovus is in a much better shape than most of its peers in the oil patch; the debt-to-capital ratio is under 13% compared to 30-40% for its peers. In the capital budget outlook for 2016, the company will be spending less on its projects until some relief is seen in the price of oil. In 2015, project expenses were cut by 22%, and in 2016, the management expects to cut expenses by a similar amount in order to survive in such a harsh environment. Initially, Cenovus planned to invest about $1.5 billion in its Foster Creek, Christina Lake, Narrows Lake and Telephone Lake projects. The company can expect to be cutting this capital expenditure to around $1 billion or below if oil stays in the $30 range for longer. This cut in capital spending will allow Cenovus to pay its 1.37% yield and survive $30 oil while its peers in the industry quickly go bankrupt in a hurry.

Cenovus may be acquired in 2016

Cenovus is trading at a huge discount due to the collapse in oil and may be an acquisition target for firms like Suncor (NYSE:SU) or Canadian Natural Resources (NYSE:CNQ). The Narrows Lake, Telephone Lake, Foster Creek and Christina Lake projects in the oil sands are great reserves that have huge expansion potential that would add a ton of free cash flow as oil recovers. These projects have the potential to produce nearly 4 billion barrels of oil. When oil recovers, there is no doubt that the owners of these reserves are going to profit big time. Suncor has already scooped up Canadian Oil Sands (COS) and could be hungry for another acquisition in Cenovus.

Cenovus has limited downside as oil looks to have bottomed

Saudi Arabia and Russia recently announced that they would limit production so that the worldwide crude glut could be eliminated. This announcement puts a price floor on oil to around $30. I believe this is a precursor to a major rebound in the price of oil that will happen in 2016. With all this said, Cenovus looks to have less downside from the current levels as it is highly sensitive to the price of oil. With the price floor in place and the amount of companies cutting productions, it is possible that we may see a rebound in oil to the $50 level by the end of 2016, which would make Cenovus a very profitable company again. If you're bullish on oil, then CVE could be a very profitable play going into the latter part of 2016.

Supporting Documents

  1. 20160211-q4-results.pdf

Disclosure: I am/we are long SU.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.