In this Ivy Investment Alert, I cover why Cenovus Energy (CVE) is a good buy under $19 per share.
A summary of compelling tailwinds to justify the buy include:
- Aggressive management share buyback, suggesting leadership believes shares are undervalued
- Strong cash flows and earnings to cover dividend payments to shareholders and interest on balance sheet respectively
- Valuation: 32% upside
> Current Price: $18.18 per share
Cenovus Energy 101
Cenovus Energy is involved in the exploration, development, and production of oil and natural gas resources in Canada. It operates in the upstream oil and gas sector and also has downstream operations, which include refining, marketing, and transportation of crude oil and natural gas liquids.
The upstream operations include:
- oil sands development,
- oil and natural gas exploration and production, and
- conventional oil production.
The company’s oil sands operations are located in northeastern Alberta, where it extracts bitumen from the oil sands and converts it into crude oil.
So, why buy the stock?
What makes the company attractive from an investment standpoint is:
- Strong Management Team & Asset Base: Diverse portfolio of assets that includes oil sands, conventional oil and natural gas, and refining and marketing operations. Management has a proven track record of operational performance and delivering on production targets.
- Cost Controls: Cost-cutting has helped the company to weather the industry downturn and maintain profitability. Executives are focused on driving efficiencies across its operations, which has resulted in lower opex and improved margins.
- Share Buybacks & Balance Sheet: The top brass has demonstrated a prudent approach to capital allocation and is focused on generating value by returning capital to shareholders through dividends and share buybacks. Management has also reduced balance sheet debt levels over the past few years.
- Sector tailwinds: The long-term outlook for the oil and gas industry is positive, with growing global demand for energy and a limited supply of new reserves. This Canadian oil and natural gas company is well-positioned to benefit from these trends, with a strong production base and a focus on cost management and operational excellence.
- Dividend: The company pays a dividend of 1.71% annually
On a valuation basis, the company is a compelling buy right now. I see fair value sitting at $24 per share, which would suggest upside potential of 32% from the current price at the time of research, which is $18.18 per share.
Another tidbit supporting a buy now is that Stan Druckenmiller, who famously has never had a down year, increased his stake in CVE by 222% in his latest 13F filing. Based on my research, the average price he paid per share is around $17.85 per share. The stock is a bit higher than that now, and I believe under $19 per share is a good deal for CVE.