Cenovus Energy Inc. (CVE - Get Rating) is a Calgary, Canada-based integrated energy business with oil and natural gas production operations in Canada and the Asia Pacific. The company is committed to managing its assets in a secure, innovative, and cost-effective manner, incorporating environmental, social, and governance factors into its business objectives. The stock has gained 133.6% in price over the past year closing yesterday’s session at $14.39.

Following its $23.6 billion acquisition of Husky Energy last year, Cenovus Energy has been selling off non-core assets and de-levering its balance sheet. It intends to reduce net debt to less than $8 billion by the middle of 2022.

However, oil prices fell marginally yesterday, as investors grabbed profits following two days of gains due to concerns about aggressive interest rate hikes. After increasing 5.6% over the past two days, U.S. West Texas Intermediate (WTI) oil futures settled down 0.6%, at $82.12 per barrel. Furthermore, according to the Energy Information Administration, crude oil stocks in the United States declined more than predicted to their lowest level since October 2018. As a result, CVE’s near-term prospects look uncertain.

Here is what could shape CVE’s performance in the near term:

Selling Assets to Repay Debt

Last month, CVE agreed to sell its Husky retail fuels network and the Wembley assets in its conventional business for nearly $660 million. In addition, it also agreed to sell Tucker thermal asset for $800 million. The company intends to use the net proceeds of the sales to reduce debt and boost shareholder returns. CVE expects to realize approximately $2 billion of total proceeds from asset sales announced in 2021.

Mixed Profitability

CVE’s 2.35% net income margin is 11.8% higher than the 2.10% industry average. Also, its $3.15 billion trailing-12-months cash from operations is 1015.8% higher than the $281.92 million industry average.

However, CVE’s 22.5% trailing-12-months gross profit margin  is 42.1% lower than the 38.9% industry average. Also, its 7.8% trailing-12-months levered FCF margin is 20.9% lower than the 9.9% industry average. Furthermore, its 5.5% trailing-12-months CAPEX/Sales multiple is 29.8% lower than the 7.9% industry average.

Consensus Rating and Price Target Indicate Potential Upside

Each of the 14 Wall Street analysts that rated CVE have rated it Buy. The 12-month median price target of $17.16 indicates a 19.3% potential upside. The price targets range from a low of $11.59 to a high of $20.00.

POWR Ratings Reflect Uncertainty

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

Our proprietary rating system also evaluates each stock based on eight distinct categories. CVE has a C grade for Stability and Quality. The stock’s 3.68 beta justifies the Stability grade. In addition, CVE’s mixed profitability is consistent with its Quality grade.

Of 77 stocks in the B-rated Energy – Oil & Gas industry, CVE is ranked #27.

Beyond what I have stated above, one can view CVE ratings for Growth, Value, Momentum, and Sentiment here.

Bottom Line

The acquisition of Husky Energy Inc. positions CVE to produce superior returns for investors over the long term. However, uncertainty regarding global demand for oil with the rise in COVID-19 cases makes CVE’s near-term prospects look uncertain. So, we believe it is better to wait before scooping up its shares.

How Does Cenovus Energy Inc. (CVE) Stack Up Against its Peers?

While CVE has an overall C rating, one might want to consider its industry peers VAALCO Energy Inc. (EGY - Get Rating) and SilverBow Resources Inc. (SBOW - Get Rating), which have an overall A (Strong Buy) rating.

Note that SBOW is one of the few stocks handpicked by our Chief Value Strategist, Steve Reitmeister, currently in the POWR Value portfolio. Learn more here.

CVE shares rose $0.06 (+0.42%) in premarket trading Friday. Year-to-date, CVE has gained 17.67%, versus a -2.86% rise in the benchmark S&P 500 index during the same period.

About the Author: Pragya Pandey

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate. More...

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