Both companies are said to be exemplary at repaying debt and shareholders.
Cenovus Energy Inc. (TSX—CVE; NYSE—CVE)
Jefferies analyst Lloyd Byrne says Cenovus Energy Inc. (CVE-TSX, $23.02; CVE-NYSE, US$17.08) remains inexpensive relative to peers as of Oct. 18. He says it’s cheap despite consistent operational performance, material portfolio high-grading, strong management and rapid balance sheet improvement.
Cenovus has been in steady state of transformation since early 2021 when its merger with Canadian integrated peer Husky Energy Inc. closed. The deal was met with skepticism given doubts over the Husky assets which included onshore and offshore gas production (some in Asia) and retail that was well outside Cenovus’s hitherto scope, plus some lesser quality oil sands assets.
In Mr. Byrne’s view, Cenovus has done a commendable job in “high-grading” the combined asset base into a much more streamlined integrated entity. The company sold Tucker (Alberta oil sands), Wembley (natural gas) and the Husky retail assets over the last year (plus $300 million of other minor asset sales), receiving solid valuations for each and totaling $1.8 billion.
Cenovus effectively redeployed about $1.6 billion of the proceeds toward buying the remaining 50 per cent stakes in the Sunrise oil sands project and the Toledo refinery from BP plc (Toledo has yet to close). The company bolstered core holdings for its integrated model from a major that is committed to divesting traditional oil-and-gas assets
The company is already repurchasing shares and should accelerate shareholder returns as net debt falls to about $4 billion in first-half 2023. Net debt fell to $7.5 billion in second-quarter 2022 from $12.4 billion in second-quarter 2021.
Cenovus is currently returning 50 per cent of free cash flow (FCF) to shareholders via buybacks. FCF generation should continue to lower net debt and Cenovus intends to increase the payout to 100 per cent once net debt hits $4 billion. The current valuation would allow Cenovus to retire about 25 per cent of current shares outstanding by 2025’s end. “We think continued execution helps catalyze a re-rating…while rising commodity prices since the start of 2021 have certainly helped, management should receive credit for deleveraging the balance sheet since the Husky merger,” says Mr. Byrne.
He initiates coverage of Cenovus with a “buy” recommendation and price target of $35 per share. That puts it in second place on our top-10 “buys” list.
Canadian Natural Resources Ltd. (TSX—CNQ; NYSE—CNQ) showcases exemplary execution, says Mr. Byrne. But as it is already well recognized by the marketplace, he initiates coverage with a “hold” recommendation.
The analyst explains, “Canadian Natural Resources is a leadership company that has always prioritized superior execution, while creating the ‘blueprint’ for investing and acquiring counter-cyclically to optimize return on invested capital.
“Management has always owned a significant percentage of the company, and it shows. It has always been a favourite. That said, the valuation premium relative to Canadian peers has us looking for a better opportunity to add. We see greater upside in Cenovus Energy Inc. currently.”
Canadian Natural Resources focuses on its “Four Pillars” which are maintaining an investment grade balance sheet; returning cash to shareholders; capital discipline; and opportunistic acquisitions.
Going forward, the company continues to examine high return brownfield and technological avenues to support growth and returns. The company expects to add almost 160,000 barrels of oil daily (about 12 per cent growth over 2022) by 2025 from brownfield growth initiatives across its in-situ, mining and exploration-and-production assets.
Canadian Natural Resources has increased the dividend 22 consecutive years, executed buybacks consistently since 2018 and paid special dividends, including the $1.50 per share special dividend paid in August. Canadian Natural Resources is currently returning 50 per cent of adjusted funds flow to shareholders via buybacks.
When net debt reaches $8 billion, Canadian Natural Resources plans to allocate additional funds to shareholder returns. The analyst expects net debt to be about $11 billion exiting 2022 and under $8 billion by mid-2023, so the proportion of FCF going to shareholders is likely to increase in second-half 2023.
Mr. Byrne’s initial “hold” recommendation places Canadian Natural Resources tied for third place on our top-10 “buys” list. Eight other analysts, however, give it a “buy” recommendation.
This is an edited version of an article that was originally published for subscribers in the November 18, 2022, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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Investor's Digest of Canada •1/12/23 •