Contrarian Investors: Why Cenovus Energy (TSX:CVE) Is the Best Deal in the Oil Patch

Here’s why energy stocks like Cenovus Energy Inc. (TSX:CVE)(NYSE:CVE) are still worth buying as the oil patch continues to tread water.

| More on:

The Albertan oil patch continues to be in a world of pain with energy layoffs continuing to happen more than five years after the collapse in oil prices, the most recent round of the dismissals announced by Husky Energy on Tuesday.

Alberta Premier Jason Kenney’s corporate tax cuts aren’t creating jobs as was intended. As Canadian energy stocks continue to tread water, it’s tough to justify an investment in the oil patch as the pains continue.

The boom and bust nature of the oil patch is nothing new, and unfortunately, only time (or pipelines) will be able to heal the wounds of the ailing firms operating in Alberta’s oil patch. What separates the long-term winners from the rest of the pack, though, is progress that’s made during times of turmoil.

If you’re keen on placing a contrarian bet on one of the oil sands giants, you’re going to want a company that’s using the downturn as an opportunity to make fundamental, long-lived operational improvements, rather than a firm that’s just waiting around for oil prices to go higher before turning the taps back on again.

The firms that cut excessively and hibernate amidst the energy recession will still stand to bounce back in conjunction with oil prices when the time comes, but not to the same extent as firms that have been working hard in the downturn to become a better version of itself.

Cenovus Energy (TSX:CVE)(NYSE:CVE) stands out to me as one of the firms that have been using the recent downturn as an opportunity to better position itself for the extremely long term.

In prior pieces, I praised Cenovus for progress in its solvent-aided extraction process (SAP), which aims to reduce break-even costs and make operations more economical, even in a lower oil price environment.

As you may be aware, oil sands operations are ridiculously expensive, and with the heavy crude bottleneck that’s keeping WCS prices depressed, it’s become uneconomical to keep the spigots turned onto their full capacity.

Many promising assets of the oil sands operators are landlocked for the time being, but Cenovus isn’t just going to wait another five years for the tables to turn.

The company continues to make progress on its SAP production technology, and over the next few years, Cenovus could find itself an industry leader should the extraction process allow for free cash flow generation well below US$50 WTI.

Add the potential pipeline progress into the equation and Cenovus could be one of the most rewarding bets for patient deep-value investors over the next decade.

For now, stash shares in your TFSA and just forget that you own them. The stock is absurdly cheap and may be close to a bottom at only 0.74 times book and 0.65 times sales.

Foolish takeaway

Buying and holding energy stocks with the hope that oil prices will recover is not investing. It’s speculating, and unless you’re a seasoned commodities trader, such a strategy is likely to cause you to lose big money.

When you’re looking for a long-term contrarian play, look to companies that are making progress in spite of any industry-wide difficulties.

Cenovus is striving to become a better version of itself as oil prices remain depressed and with a plan to become more economical in a lower oil environment, the stock could provide substantial returns, even if oil weren’t to bounce back to pre-2014 levels.

Add the severely depressed valuation and the likelihood of pipeline progress into the equation, and you’ve got yourself a stock that has a highly favourable risk/reward trade-off.

Stay hungry. 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 Joey Frenette has no position in any of the stocks mentioned.

More on Energy Stocks

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 »

Pumpjack in Alberta Canada
Energy Stocks

Is Imperial Oil Stock a Buy, Sell, or Hold for 2025?

Imperial Oil stock is in a precarious position, so what should investors consider as we head nearer to 2025?

Read more »

construction workers talk on the job site
Energy Stocks

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

Suncor Energy stock is trading at its decade-high on uncertainty in the oil market. Should you buy, sell, or hold…

Read more »