CVE - Cenovus Energy

[Ballinvarosig Investors]

I haven't created many of these types of threads and I am certainly no oil expert, but I feel that the recent collapse in the market value of Cenovus Energy has presented a nice opportunity here.

 

For those of you who aren't aware, Cenovus Energy are an integrated oil producer who were originally spun out of Encana a few years back. Just last week, it announced a completely trans-formative deal whereby it was going to acquire substantially all the Canadian oil sands assets of ConocoPhillips almost exactly doubling in size. Unfortunately to absorb this deal, Cenovus are also going to have to completely transform the balance sheet, taking on more leverage, issuing more shares and using using up some of the cash on their (formerly) fortress balance sheet. The market has reacted quite sharply against the deal, cutting Cenovus sharply as it has fears about the leverage. On the other hand, COP has went up sharply. While it's quite understandable that COP's share price is up given how strongly leveraged their balance sheet was, I am a little puzzled at why Cenovus is getting beaten up so badly. For me, Cenovus on a NAV basis trades well below intrinsic value, considering the excellent low costs assets that they own (free cash flow break even at about $50).

 

Before acquisition (all values $USD)

 

3.8B proven/probable barrels

$6 blended value per barrel (assume long-term price of $60 per barrel)

$2B net debt

833M shares outstanding

NAV per share $25

 

After acquisition (before any asset sales)

 

7.8B proven/probable barrels

$6 blended value per barrel (assume long-term price of $60 per barrel)

$10.5B net debt

1228M shares outstanding = 833M (current) + 208M (to COP) + 187M (new issuance)

NAV per share $29.50

 

According to my numbers at least, this deal is actually acquisitive to NAV all things being the same. Of course, with debt at 5x EBITDA, this is not sustainable. However, they have indicated towards $2.7B of assets sales. Let's say they dispose of 1B worth of reserves at $3 a barrel, then netting out some costs, you get the following NAV with a net debt/EBITDA far more in line with competitors.

 

After asset sales at depressed prices

 

6.8B proven/probable barrels

$6 blended value per barrel (assume long-term price of $60 per barrel)

$7.8B net debt

1228M shares outstanding = 833M (current) + 208M (to COP) + 187M (new issuance)

NAV per share $26.90

 

Calculations were fairly rough and I did try to err on the side of caution with regard to valuations, even at that I think Cenovus is cheap. Open to any corrections, all values are in USD.

[Cigarbutt]

Your numbers look good.

I'm not a true oil expert either.

But.

 

My take is that Cenovus is a potential survivor in the industry because it has shown over the years ability to focus on costs. Long term, in an oil sands oligopoly type situation AND a satisfactory above break-even price (not a given), Cenovus would likely do very well. However, with the recent deal, they have compromised on the leverage front.

 

Commodity/oil investing is tough, but, if you believe in favorable oil prices for the long term, Cenovus seems like a good candidate.

There may be rough patches along the way and I would submit that you have to include these potential scenarios in your analysis.

 

Vito Maida made relevant comments about long term IV. See fall 2015 report.

http://www.patientcapital.com/news

At around the same time, Burgundy asset management came up with, I thought, an interesting piece about the valuation of theses assets.

http://www.burgundyasset.com/data/newsletter/2015-12-Not_the_Time_to_Sell.pdf

 

Too hard for me though. Will re-visit.

Good luck.

 

[K2SO]

Assuming a LT oil price of $60bbl is a tough call. You're right - IF the oil price holds up, this will be a great deal for Cenovus. But there is far less of a margin of safety if oil prices remain depressed, or even fall from here. And I think that's what's causing the selling of Cenovus - it's become a lot more leveraged to the price of oil. Conservative investors who may have owned it based on the strength of hte balance sheet really have little choice but to sell. If you're bullish on oil LT, then I agree this presents a very attractive opportunity.  I'm just not in that camp.

 

 

[bizaro86]

I think the selling here is partially technical. They issued a big bought deal, and COP said they will sell their shares. A couple of folks I've mentioned this to have said they won't buy something with that big an overhang, which hurts it in the now but doesn't change the value.

[Cardboard]

There are a lot of call it, non-core assets that this company could sell and significantly reduce its debt burden following this complimentary acquisition.

 

For example, they own 50% of two refineries operated by Phillips 66. These two refineries, with Wood River being its largest, represent 21% of Phillips 66 overall 2.2 million barrels/day of refining capacity.

 

They also own a crude-by-rail terminal at Bruderheim, Alberta and lots of conventional and oil sands assets for which they could alter the current disposal plan.

 

Cardboard

[Ballinvarosig Investors]

It's kind of crazy that a company with these assets is now selling for under $11 billion, bear in mind, this is before Conoco have even disposed of a single share (just just reported their 16.9% stake of Cenovus on the 26th of May). I have really started to get interested in this now.

[indirect]

With such a large overhang, I believe it will continue to fall.

[blainehodder]

Comps on this are reaching really attractive levels now.

[Guest 50centdollars]

The management and board of this company are a trainwreck. How could they not factor in falling oil prices when they did this deal? CEO said today that everything is fine while their stock prices goes down the toilet.

 

They got fleeced hard on this deal and the market knew it right away. I dont understand what they were thinking.

 

Now the company wants to sell assets because of too much debt? Who is going to buy thiem? I really dont understand how this happened. They were foolish.

 

 

[Spekulatius]

Worth revisiting now, with the new mangement in Place from Transcanada. Company is delevering (debt is at 2.8x EBITDA down from a 4.2x Peak) and they seem to be cutting cost and overhead quickly. I bought a starter position a few day ago, because I like what I see. I think the  new mangement should make a tremendous difference, the assets were good all along, IMO.

[Gilp]

The thesis looks interesting from a value based view, I've started doing some research and one of the red flags I've encountered is the reviews on glassdoor:

 

https://www.glassdoor.com/Reviews/Cenovus-Reviews-E354451.htm?sort.sortType=RD&sort.ascending=false&filter.employmentStatus=REGULAR&filter.employmentStatus=PART_TIME&filter.employmentStatus=UNKNOWN

 

Almost all the recent reviews are negative, they mention very low employee morale, missmanagement, political and clique style environment, horrible HR department. Yes the company suffered a lot and lots of oil&gas employees suffered during the downturn, but I've took a look at several other o&g companies and the reviews are much better.

 

It's a big question if the new management can fix this.

 

Other than that looks promising.

[fareastwarriors]

Cenovus Energy Agrees to Buy Husky Energy in All-Stock Deal

Li Ka-shing entities will own about 27% of combined company

 

Cenovus Energy Inc. agreed to buy Husky Energy Inc. in an all-stock deal valuing Husky at about C$3.8 billion ($2.9 billion), creating Canada’s third-largest oil and natural gas producer.

 

 

https://www.bloomberg.com/news/articles/2020-10-25/cenovus-energy-to-combine-with-husky-energy-in-all-stock-deal?srnd=premium