Why Cenovus Energy May Benefit From A New Wave Of Mergers In Oil And Gas

| About: Cenovus Energy, (CVE)

Summary

Stock price cut in half since peak despite strong balance sheet.

Recent merger wave has many analysts suggesting Cenovus would be a bargain at this price.

Positive earnings in the past three years with growing comprehensive income make CVE a stand-out compared with its peers in the oil and gas sector.

Cenovus Energy (NYSE:CVE) has been the subject of a number of rumors circulating since Suncor's (NYSE:SU) recent acquisition of Canadian Oil Sands (OTCQX:COSWF). Cenovus is currently sitting on a massive cash hoard, and is one of the largest Canadian oil and gas producers, suggesting to many analysts that the recent drop in CVE of over 50% since its peak may offer an entry price just sweet enough for a company like Suncor to move forward with a bid. Short-term speculation aside, CVE is a strong company with positive earnings in a sector that may be on the verge of a rebound in oil to normalized long-term levels.

Cash Position

Cenovus is currently sitting on cash reserves of $4.1 Billion, and is much better positioned than many of its comparable peers to ride out the current low-price commodity environment. The company now has a cash to debt position that is well above 1:1, as it has undertaken a number of financial measures to shore up its cash position including raising $1.5 Billion of equity, selling its portfolio of royalty lands for $3.3 Billion, and dramatically cutting capital expenditures and operating costs. Looking at cash alone as an indicator of financial strength in the "storm" that has hit oil and gas in 2015, Cenovus is well positioned to make capital investments and continued dividends in the short to medium term, reducing the company's idiosyncratic risk.

Positive Earnings

Cenovus has posted impressive financial results over the past three, tumultuous years. Recording positive earnings in 2015 continues the trend of robust profitability in a very "beaten up" industry. While net earnings have maintained stability, we see that foreign currency adjustments due to the weak Canadian dollar have provided tailwinds to Cenovus, posting incremental increases of 31% and 17% YOY in 2015 and 2014, respectively.

(Source: Cenovus 2015 Annual Report)

Operational Efficiency

The fact that CVE has been able to maintain positive net earnings despite a drop of 34% YOY speaks to the critical operational cost improvement measures made at the company, as well as cuts to capital expenditures at its Foster Creek, Christina Lake, Narrows Lake, and Telephone Lake projects. Indeed, Cenovus has cut capex by 41% YOY in 2015, adding to a cut of 7% in 2014.

(Source: Cenovus 2015 Annual Report)

Conclusion

The strength of Cenovus's core assets, its continued commitment to keeping production costs low, and its substantial liquidity make CVE a value play for both investor portfolios, as well as a takeover target for larger players looking for a profitable oil producer in a sector with few such examples. We like Cenovus as both a short-term and long-term play, and will continue to monitor the stock price.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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Tagged: , , , Oil & Gas Drilling & Exploration, Canada
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