Why Cenovus Energy Inc. (TSX:CVE) Is 1 of My Top Energy Stock Picks

With a rapidly increasing cash flow profile, investors can safely expect growing dividends from Cenovus Energy Inc. (TSX:CVE)(NYSE:CVE).

| More on:
The Motley Fool

Integrated oil giant Cenovus Energy (TSX:CVE)(NYSE:CVE) stock has continued its relentless decline and now trades a full 68% lower than it did four years ago. This is despite the fact that its business is markedly more efficient and profitable now compared to 2014.

To illustrate this point, if we look at the company’s operating cash flow, we can see that it was 15% lower in 2017 compared to 2014. But looking further, we can see that this decline was a success given the fact that the company’s realized oil and natural gas liquids prices were more than 40% lower in 2017 — a better, more profitable business which has lessened the blow from the commodity price swings.

All we can ask for as investors is that our companies manage the things they have control over exceptionally well, and this is what Cenovus has done.

Let’s look a little deeper.

Strong cash flows

Over the years, Cenovus has worked hard at gaining efficiency and reducing costs.

In fact, in the last four or so years, in the oil sands the operating cost per barrel of oil has been reduced by more than 40% to well under $9. The oil sands’ sustaining capital requirement per barrel of oil has been reduced by more than 50% to approximately $6.

This has been and will continue to drive cash flows.

Furthermore, the $17.7 billion acquisition of assets from ConocoPhillips in 2017 has served to dramatically increase the company’s production profile, driving strong cash flow growth.

And as free cash flow ramps up in 2018 and 2019, I think we can expect to see increasing dividends, debt reduction, and more share buybacks.

Dividend

Cenovus is an energy stock that investors must also consider a dividend stock.

Although the current dividend yield on Cenovus stock is not that high, at 1.75%, the point is that I think investors can expect significant increases in the dividend over the next few years as free cash flow ramps up significantly.

Undervalued

Cenovus trades at less than five times cash flow and at less than book value, or 0.8 times book value, to be more precise.

So, as the next couple of years unfold, shareholders will increasingly be able to reap the rewards of the company’s significantly higher production, lower costs, and investment in high-return growth projects such as Christina Lake Phase G.

This will come in the form of higher dividends, share buybacks, and a strengthened balance sheet.

For investors looking for an another energy stock that is also a dividend stock that’s rich in cash flow, check out Canadian Natural Resources (TSX:CNQ)(NYSE:CNQ).

The stock has a 3.18% dividend yield, and the company has continued to generate rapidly rising cash flows and an increasing dividend. In fact, the company recently announced a 22% dividend increase, signaling management’s bullish long-term view.

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 Karen Thomas owns shares of Canadian Natural Resources and CDN NATURAL RES.

More on Dividend Stocks

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

It’s Time to Buy: 1 Canadian Stock That Hasn’t Been This Cheap in Years

A Canadian stock with visible growth potential could be worth buying, notwithstanding its depressed price.

Read more »

ways to boost income
Dividend Stocks

Invest $10,000 in These Dividend Stocks for $410 in Passive Income

Got $10,000 to invest in passive income? Check out this four stock portfolio for earning $410 of dividends every year.

Read more »

Dividend Stocks

This 8.77% Dividend Stock Pays Cash Every Month

This top monthly dividend stock is a top choice if you want essential cash flowing in every single month.

Read more »

senior man smiles next to a light-filled window
Dividend Stocks

Claiming CPP Later Could Be a Smart Move for Canadians

Claiming the CPP later is smart because a financial reward awaits each year past 65.

Read more »

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

2 Stocks I’ll Be Adding to My TFSA – Even With the TSX at All-Time Highs

As reasonably valued TFSA stocks today, Bank of Nova Scotia and Canadian National Railway offer reliable dividends and long-term growth…

Read more »

Paper Canadian currency of various denominations
Dividend Stocks

Is Telus Stock a Buy for its 7.5% Dividend Yield?

Telus (TSX:T) stock has certainly been an underperformer in recent years, but let's dive into why this dividend stock could…

Read more »

analyze data
Dividend Stocks

7.4% Dividend Yield? I’m Buying This Monthly Passive-Income Stock in Bulk!

This top dividend stock is an ideal buy -- not just for its dividend yield.

Read more »

Income and growth financial chart
Dividend Stocks

Is Canadian Tire Stock a Buy for its 4.6% Dividend Yield?

Canadian Tire stock offers a solid 4.6% dividend, making it a top pick for investors seeking reliable passive income and…

Read more »