Is Cenovus Energy Inc. (TSX:CVE) a Worthwhile Investment?

The outlook for Cenovus Energy Inc. (TSX:CVE)(NYSE:CVE) remains uncertain, despite higher oil.

| More on:
The Motley Fool

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Oil’s latest rally as well as the convergence of the price differential between West Texas Intermediate (WTI) and Brent have generated considerable interest in energy stocks.

One that has been garnering considerable attention is beaten-down Cenovus Energy Inc. (TSX:CVE)(NYSE:CVE). The heavy oil producer has seen its market value rise by a mere 5% for the year to date, significantly lagging behind WTI, which has gained almost 20%. Some pundits claim that Cenovus is an attractively valued energy stock that is poised to soar. While there is no doubt that higher crude will act as a tailwind for Cenovus, it appears that there are better investment opportunities in the North American oil patch. 

Now what?

For the first quarter 2018, Cenovus reported some disturbing results. While oil and gas production from continuing operations grew almost three-fold compared to a year earlier, driving higher revenue, profitability and net earnings plunged sharply. Cenovus reported a netback of $5.11 per barrel of oil sold, which was less than a third of the $16.24 reported for the first quarter in 2017. That indicates there was a significant decline in the company’s operational profitability and was among the key reasons for Cenovus reporting a net loss of $654 million compared to a net profit of $2.6 billion a year earlier.

The marked deterioration in the profitability of Cenovus’s operations can be primarily attributed to the deep discount applied to Canadian heavy oil, Western Canadian Select (WCS), and sharply weaker natural gas prices. While the differential between WCS and WTI has converged in recent weeks, it remains at just under US$21 per barrel, which is around US$3 a barrel lower than it was at the start of the year. That is having a significant impact on Cenovus’s profitability, because heavy crude makes up roughly 74% of the company’s production.

The other issue is weaker natural gas, which is responsible for the remaining 26% of Cenovus’s output. Natural gas, which is trading around US$3 per million British thermal units (mmBtu), remains caught in a protracted slump, while there are signs that prices could firm further, particularly once winter commences, a rapid expansion of supply will weigh on prices.

Another factor eating into Cenovus’s profitability is that firmer WTI means higher condensate prices, and condensate performs a crucial role for heavy oil producers, because it acts as a diluent, which makes it flow, so it can be transported. This was reflected in a 7.5% year-over-year increase in first-quarter 2018 transport and blending costs. As WTI climbs higher, it will push up the price of condensate, further impacting Cenovus’s profitability.

The only bright spot in Cenovus’s outlook is that its refining business is returning to full capacity after the completion of turnarounds during the first quarter. That in combination with wider light/heavy crude oil differentials will boost profitability and offset the impact of the deep discount applied to WTI. 

So what?

Cenovus certainly isn’t my first pick when it comes to playing higher oil. Upstream oil producers such as Crescent Point Energy Corp. (TSX:CPG)(NYSE:CPG) or Baytex Energy Corp. (TSX:BTE)(NYSE:BTE), where a considerably portion of their oil output is light and medium crude, are more attractive opportunities. Both possess high-quality light oil acreages, are trading at less than the net asset value of their oil reserves, and are growing production at a steady clip.

Should you invest $1,000 in Cenovus Energy right now?

Before you buy stock in Cenovus Energy, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Cenovus Energy wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $20,697.16!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 29 percentage points since 2013*.

See the Top Stocks * Returns as of 3/20/25

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 Matt Smith has no position in any stocks mentioned.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Energy Stocks

golden sunset in crude oil refinery with pipeline system
Energy Stocks

Is Enbridge Stock (TSX:ENB) a Buy for its 5.9% Dividend Yield?

This solid dividend payer has the potential to help investors generate reliable passive income for decades.

Read more »

nugget gold
Dividend Stocks

Recession Stocks Are Back: Consider Buying the Dip This April

Recession stocks are back, and this one could be a solid winner.

Read more »

Person holds banknotes of Canadian dollars
Energy Stocks

Best Stock to Buy Right Now: Suncor vs Cenovus?

Suncor stock's 4.2% dividend yield vs Cenovus Energy's growth potential: Tariff-proof safety or growth gamble?

Read more »

Blocks conceptualizing Canada's Tax Free Savings Account
Dividend Stocks

How to Earn $500/Month in Tax-Free Income With Your TFSA

Canadians can earn $500 or a desired tax-free income every month by saving and investing through the TFSA.

Read more »

how to save money
Energy Stocks

1 Canadian Stock Ready to Surge in 2025 and Beyond

This Canadian stock has seen significant growth, but more could come for 2025 and beyond.

Read more »

oil and natural gas
Energy Stocks

Here’s How Many Shares of Enbridge You Should Own to Get $2,000 in Yearly Dividends

Solid dividend stocks like Enbridge could help you generate reliable passive income for decades.

Read more »

Pumpjack in Alberta Canada
Energy Stocks

3 Canadian Oil and Gas Stocks to Watch for in 2025

Oil companies like Suncor Energy (TSX:SU) are doing well this year.

Read more »

Aerial view of a wind farm
Energy Stocks

The Best Renewable Energy Stocks to Buy Before They Take Off

Here are two of the best Canadian renewable energy stocks you can buy today and hold for the long term…

Read more »