Oil Price Slide: Profit With Cenovus Energy Inc. and Pembina Pipeline Corporation

Cenovus Energy (TSX:CVE)(NYSE:CVE) and Pembina Pipeline Corporation(TSX:PPL)(NYSE:PBA) have the capability to profit in a weak oil price market.

| More on:
The Motley Fool

Canadian investors know that the Toronto Stock Exchange is an energy-heavy exchange, with S&P/TSX Composite Index being 25% weighted toward the energy sector.

With much of Canada’s economic growth coming from the oil sands, it is difficult, and perhaps unwise, to avoid energy stocks completely. Unfortunately, energy stocks are extremely exposed to commodity price risk, and with oil prices dropping 25% since the summer, investors may be wondering how to minimize risk while staying exposed to this sector.

Cenovus Energy Inc. (TSX: CVE)(NYSE: CVE) and Pembina Pipeline Corporation (TSX: PPL)(NYSE: PBA) offer a solution.

Why Cenovus Energy is a smart play in a weak price environment

Low oil prices equal lower margins for oil producers. Goldman Sachs estimates the global average supply cost breakeven point for an oil project is US$70/bbl. That is to say, most oil projects would need oil prices of at least $70 bbl to remain profitable.

Some new Canadian projects have breakeven points higher than this. It makes sense then, that companies with low production costs, especially companies with breakeven points significantly below the current U $82 price for West Texas Intermediate, are most prepare to thrive in a low price environment.

Cenovus Energy has among the lowest global supply costs, with a breakeven point between US$35-$65/bbl. This means in the current price environment, Cenovus will be solidly profitable.

These low costs are likely to stay as well. Cenovus is weighted towards oil sands rather than conventional oil, and contrary to popular belief, oil sands projects are more economic than the conventional tight oil plays in the U.S. according to a recent BMO report. This is due to the fact that oil sands projects have very low decline rates compared to U.S. tight oil plays, and after a high initial capital expenditure, can produce and expand for decades at low cost.

In addition, Cenovus is continually improving its steam-to-oil ratio (SOR), which will further drive down costs, and is already the lowest in the industry. For steam-assisted gravity drainage (SAGD) projects, which include all of Cenovus’ oil sands operations, the SOR is a measure of how much steam is required to produce a barrel of oil. Low SOR means lower capital costs and lower operating costs, which equates to higher margins.

Cenovus’ Narrows Lake project is also expected to be the industry’s first demonstration of solvent aided process (SAP) technology, which is a modification to standard SAGD technology that uses a solvent together with steam. This is expected to reduce SOR by 30%, and increase oil recovery from the reservoir by 15%, further cutting costs.

Why Pembina Pipeline is a smart play in a weak price environment

Pipelines get most of their revenue independent of commodity prices, through fee-based contracts. Fee-based contracts involve the pipeline being paid per unit of production transported, and since pipelines get paid based on volume, oil prices do not strongly affect profits.

Pembina Pipeline is especially well suited to benefit going forward. Currently, Pembina transports over 50% of western Canadian conventional oil, and 30% of  NGL volumes.

Unlike its peers, Pembina has the advantage of having 100% of its projects being fee-for-service. This means Pembina has no commodity price risk at all. In addition, its major projects are backed by long-term contracts, most of them 25+ years, including volume commitments.

In this, Pembina offers investors a way to participate in the massive volume growth coming out of Western Canada, without exposure to price risk.

Although oil prices are uncertain, oil production growth is expected to increase dramatically, and Pembina is prepared to capitalize on this growth as its customers demand greater access to refineries and export pipelines. With a $7.8 billion project backlog, Pembina is expected to grow its capacity from the current 628 mbpd to ~1508 mbpd over the next several years.

For investors wary about oil prices, Pembina provides exposure to growth without  commodity risk and Cenovus provides exposure to oil production through a low-cost, low-risk producer.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Adam Mancini has no position in any stocks mentioned.

More on Energy Stocks

Trans Alaska Pipeline with Autumn Colors
Energy Stocks

Is Enbridge Stock a Good Buy?

Enbridge provides a 6.5% dividend yield right now.

Read more »

Oil industry worker works in oilfield
Energy Stocks

Is Suncor Stock a Buy, Sell, or Hold for 2025?

Suncor stock looks undervalued as the company continues to increases cash flows, earnings, and shareholder returns.

Read more »

construction workers talk on the job site
Energy Stocks

Best Stock to Buy Right Now: Baytex vs Suncor?

Suncor and Baytex stocks both look like solid companies offering growth and dividends. But which is the better buy?

Read more »

bulb idea thinking
Energy Stocks

3 Incredibly Cheap Energy Stocks to Buy Now

Energy stocks are trending upwards on the back of several key factors. And these three continue to be top cheap…

Read more »

Pumpjack in Alberta Canada
Energy Stocks

Should You Buy Freehold Royalties Stock for its 8% Yield?

Freehold Royalties is a TSX dividend stock that offers shareholders a forward yield of 8%. But is the energy stock…

Read more »

Muscles Drawn On Black board
Energy Stocks

Is Suncor Energy Stock a Good Buy?

Suncor is on a roll in 2024. Are more gains on the way?

Read more »

profit rises over time
Top TSX Stocks

3 Reasons to Buy Enbridge Like There’s No Tomorrow

Have you considered buying Enbridge (TSX:ENB)? Here are 3 reasons to buy Enbridge today for lasting growth and income.

Read more »

oil pump jack under night sky
Energy Stocks

Is CNQ Stock a Buy for its 4.5% Dividend Yield?

CNQ stock is one of the best options out there for dividend growth. But what about value? Let's take a…

Read more »