This Is Why Cenovus Energy Inc. (TSX:CVE) Stock Is Up 42% in the Last 5 Months

Shares in Cenovus Energy Inc (TSX:CVE)(NYSE:CVE) are up 42% in the last 5 months since the beginning of March. Is there still time to get in on the rally?

| More on:

Shares in Cenovus Energy Inc. (TSX:CVE)(NYSE:CVE) are up 42% in the last five months since the beginning of March.

While some may have seen it coming, there is good reason to believe that even following the impressive run, there may still be some gas left in the proverbial tank of the Canadian integrated oil and gas producer.

For most of the past year, Cenovus shares have been unfairly punished by the market for two key reasons.

One is the markets unwillingness to accept and adjust to the firms acquisition of its outstanding 50% interest in the FCCL partnership with ConocoPhillips (NYSE:COP).

The deal effectively doubled Cenovus total production capacity, which on the surface sounds great, but it wasn’t long before it became apparent that the market had some concerns with the deal.

Namely, that Cenovus took on $7.4 as a result of the acquisition.

That in turn led to fears that Cenovus would be unable to service the additional debt load while simultaneously funding new growth projects and financing its dividend.

Those fears about the sustainability of the company’s dividend may very well have been exacerbated by the fact that Cenovus had already cut its dividend twice amidst the slump in oil prices — once in 2015 and again in 2016.

Cenovus shares yield 1.50% today.

Making matters worse was the slump in oil prices that plagued the Canadian market to start the year.

A troublesome bottleneck had prevented Canadian crude from reaching American markets, which led to an oversupply in the oil sands and sent prices crashing.

That prevented several key Canadian energy players from participating in the rally of U.S. energy stocks that took place earlier this year while the price of West Texas Intermediate Crude (WTIC) soared towards $70 per barrel.

But the underappreciated aspect of Cenovus operations that ultimately helped the company outperform much of the market was its integrated business model. 

Unlike many of its Canadian peers, which are only involved in exploration and production activities, as an integrated producer, Cenovus not only takes the crude oil out of the ground, but it also owns “downstream” operations which take that crude and converts it to end products like gasoline, diesel and jet fuel.

So effectively, while the company’s “upstream” operations are affected by lower crude prices, at least part of this is offset by the fact that the company can then buy the cheap crude from itself at discounted prices and in doing so, boost the returns of its downstream operations.

Bottom line

While Cenovus stock only pays a modest dividend yield today, it does hold some characteristics that make it an “under the radar” value play.

Not only are shares trading below their current book value, but the company’s underlying cash flows following last year’s FCCL acquisition suggests that it should have the ability to sustain several years of dividend increases, meaning that the current yield may in fact be considerably understated.

Stay Foolish.

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 Jason Phillips does not own shares in any of the companies mentioned.

More on Dividend Stocks

dividends can compound over time
Dividend Stocks

Want a 7% Yield? The 3 TSX Stocks to Buy Today

These TSX stocks are offering high yields of over 7%, making them attractive for investors seeking steady passive income.

Read more »

how to save money
Dividend Stocks

The Smartest Dividend Stocks to Buy With $200 Right Now

These smartest dividend stocks can consistently pay and increase their dividends in the coming years, irrespective of the macro uncertainty.

Read more »

Electricity transmission towers with orange glowing wires against night sky
Dividend Stocks

3 Utility Stocks That Are Smart Buys for Canadians in November

These utility stocks benefit from regulated businesses and generate predictable cash flows that support higher dividend payouts.

Read more »

Start line on the highway
Dividend Stocks

Invest $10,000 in This Dividend Stock for $600 in Passive Income

Do you want to generate passive income? Forget the rental unit! This option will save you the mortgage yet still…

Read more »

Senior uses a laptop computer
Dividend Stocks

1 Reliable Dividend Stock for the Ultimate Retirement Income Stream

TD Bank (TSX:TD) shares are way too cheap with way too swollen a yield for retirees to pass up right…

Read more »

A worker drinks out of a mug in an office.
Dividend Stocks

Is Brookfield Infrastructure Partners a Buy for its 4.75% Yield?

Brookfield Infrastructure Partners (BIP) has a 4.75% dividend yield. Is it worth it?

Read more »

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Dividend Stocks

Where to Invest Your $7,000 TFSA Contribution

The TFSA is attractive for investors who want to generate tax-free passive income.

Read more »

The TFSA is a powerful savings vehicle for Canadians who are saving for retirement.
Dividend Stocks

TFSA Investors: 3 Dividend Stocks Worth Holding Forever

These TSX stocks have the potential to grow their dividends over the next decade, making them top investments for TFSA…

Read more »