Cenovus Energy Thoughts ($CVE)

Looking at Cenovus' results for the third quarter of 2024. 

Their upstream segment earned $1.9 billion of operating margin during the third quarter compared with $2.4 billion the prior year. The downstream segment had operating margin of negative $229 million during the third quarter compared with a positive $655 million the prior year.

Upstream capital expenditures were up 29% year-over-year, to $811 million for the third quarter. Upstream production volumes of liquids were 631k boe/d, down 3.4% year-over-year.

Cash from operations for the quarter was $1.76 billion and total capital expenditures were $956 million. That puts free cash flow at $804 million, for an annualized yield of 9.5% on the enterprise value of $34 billion.

During the third quarter, Cenovus spent $234 million on common share dividends and $520 million on share repurchases. The $754 million returned to shareholders is a shareholder yield of 10.4% on the current market capitalization of $29 billion (at a $16 share price). 

Here is where the math is going to be tricky for the fourth quarter, though:

During the third quarter, the price of WTI crude averaged $75/bbl and the 3-2-1 crack spread averaged around $19. With oil now at $70 and crack spreads at $16, results for Cenovus are going to be worse.

At 600k bbl/d of oil production, a -$5 per barrel decrease in the oil price will reduce revenue and free cash flow by $270 million per quarter or $1.08 billion per year. At 643k bbl/d of refining throughput, having crack spreads $3/bbl worse could cost $174 million per quarter or $694 million per year. [This calculations are both a bit fuzzy because things like crown royalties and input costs should go down with the oil price down.]

Assuming a hit of $1.08 billion on oil and $694 million on refining, Cenovus' annualized free cash flow would drop from $3.22 billion to $1.4 billion, which would only be a 4.2% yield on the enterprise value.

Cenovus' high cost refining (losing money when the crack spread is $19) is dragging down the results. The other major Canadian oil companies (Canadian Natural Resources, Suncor, and Imperial) generate much more earnings per barrel than Cenovus. 

We see others who are still bullish Cenovus. One of those pieces begins, "Assuming that management can improve the company's downstream performance..." Cenovus broke even in the third quarter in Canadian refining; the losses were in U.S. refining. Cenovus seems to have problems with the Lima (Ohio) refinery that came with its acquisition of Husky Energy in 2020.

Sometimes these things can't really be fixed. If you are running an airline with old, inefficient planes, you would never have results as good as a competitor with newer, more efficient planes. The more expensive jet fuel gets the worse you'll do in comparison. 

Amazingly, the Lima Refinery was opened in 1886 and is the oldest refinery in the United States. Cenovus got it in the acquisition of Husky Energy, and Husky bought it from Valero in 2007. Valero got it when they acquired a company called Premcor in 2005. Interesting that they sold it so soon afterwards.