With the acquisition of Husky Energy Inc. in January 2021, integrated energy company Cenovus Energy Inc. (CVE) became the third-largest Canadian oil and natural gas producer and the second-largest Canadian-based refiner and upgrader. The company declared a $0.02 dividend on its cumulative redeemable first preferred shares, payable on September 30, along with a third-quarter dividend.

However, the stock price has declined 13.4% over the past month to close yesterday’s trading session at $8.42. A decline in hedge fund interest in the stock is primarily responsible for the retreat. 

A specific group of money managers sold their entire stakes in CVE in the first quarter. In addition, oil prices have declined by more than 3% because the rapidly spreading COVID-19 Delta variant has raised concerns about demand. As a result, CVE’s near-term prospects look uncertain.

Here’s what we think could influence CVE’s performance in the upcoming months:

Sustainability Measures

On July 22, CVE signed a power purchase agreement to buy solar-power-produced electricity and the associated emissions offsets from a partnership between Cold Lake First Nations and Elemental Energy Inc. The move is designed to help advance two of CVE’s ESG focus areas by addressing climate and greenhouse gas emissions. Also, in June 2021, CVE began participating in the Oil Sands Pathways to Net Zero initiative to support Canada’s efforts to meet its Paris Agreement commitments and 2050 net-zero aspirations.

Robust Financials

CVE’s top line surged 386.5% year-over-year to $10.58 billion for the second quarter, ended June 30, 2021. The company’s total upstream production increased 64.6% year-over-year to 765,900 BOE/d, while its total downstream throughput increased 232.1% year-over-year to 539,000 bbls/d. Its free fund flow for the quarter came in at $1.28 billion, versus a $616 million loss in the prior-year quarter. CVE’s net earnings were $224 million in the quarter compared to a  $235 million loss in the year-ago period. Its EPS came in at $0.11 compared to a $0.19 loss per share in the prior-year period.

Sells Assets to Repay Debt

CVE divested its gross overriding royalty (GORR) in the Marten Hills area of Alberta during the second quarter of 2021 for $102 million in cash proceeds, which were used to repay debt. In addition, the company entered agreements in June and July 2021 to divest assets in the East Clearwater and Kaybob areas of Alberta. The proceeds from these sales are expected to also be used for debt reduction.

Poor Profitability

In terms of trailing-12-month gross profit margin, CVE’s 22.04% is 45.6% lower than the 40.54 industry average. Likewise, the stock’s 1.41% trailing-12-month ROTC is 41.7% lower than the 2.42% industry average. Its trailing-12-month EBIT margin and EBITDA margin of 2.84% and 15.33%, respectively,  are also lower than the 5.90% and 24.24% industry averages.

POWR Ratings Reflect Uncertainty

CVE has an overall C rating, which equates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. CVE has a B grade for Value, which is in sync with its 9.19x forward non-GAAP P/E, which is lower than the 10.50x industry average.

However, the stock has a C grade for Quality, which is consistent with its lower-than-industry profitability ratios. Furthermore,  CVE has a D grade for Stability, which is in sync with its 3.80 beta, representing extreme volatility.

In addition to the POWR Ratings grades we’ve just highlighted, we’ve also rated CVE for Growth, Momentum, and Sentiment. Get all the CVE ratings here.

CVE is ranked #24 of 93 stocks in the C-rated Energy - Oil & Gas industry.

If one is  looking for top-rated stocks in the same industry with an Overall POWR Rating of Strong Buy or Buy, one  can access them here.

Bottom Line

The acquisition of Husky Energy Inc. positions CVE to generate superior returns for investors in the long run. However, the stock’s price fell sharply over the past month due to a decline in interest from hedge funds  and uncertainty surrounding global demand for oil amid the resurgence of COVID-19 cases. So, we think it’s better to wait before scooping up its shares.

CVE shares fell $0.10 (-1.19%) in premarket trading Wednesday. Year-to-date, CVE has gained 39.07%, versus a 18.34% rise in the benchmark S&P 500 index during the same period.

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst.

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