Thursday, November 4, 2021

Cenovus Reports Q3 2021 Earnings ($CVE)

[Previously, Long Reserve Life Oil: Cenovus Energy Inc. Cenovus, which acquired Husky last yearm is the third largest Canadian oil and natural gas producer and the second largest Canadian-based refiner and upgrader.]

Cenovus is listed on the NYSE (CVE, US$12.26) and the Toronto Stock Exchange (CVE.TO, CAD$15.26). (As you can see, a CAD$ is equal to 0.80 US$). When Cenovus acquired them, Husky shareholders received common Cenovus shares plus warrants. The warrants were issued in January 2021 and have five years until expiration (January 2026) with a strike price of CAD$6.54 (or US$5.23). With the CVE shares at $12.26, the intrinsic value of the warrant is $7.03 and they trade for $7.86.

Their Q3 results summary: "[Cenovus] generated third‐quarter cash from operating activities of $2.1 billion and adjusted funds flow of $2.3 billion. Free funds flow of $1.7 billion and strategic refinancing transactions resulted in a reduction in net debt to about $11 billion at the end of the third quarter. The company expects to achieve its interim net debt target of below $10 billion imminently as a result of continued strong cash generation at current commodity prices and receipt of proceeds from announced asset sales. This will pave the way for Cenovus to increase investor returns by commencing a share buyback program of up to 146.5 million of the company’s common shares, representing approximately 10% of its public float..."

The current market capitalization is CAD$30 billion and the net debt is CAD$15 billion for a total enterprise value of CAD $46 billion. (Or $24 billion market capitalization and $37 billion in USD.) The third quarter's CAD$1.7 billion of free cash flow, which annualizes to CAD$6.8 billion (US$5.4 billion) gives a FCF/EV yield of 15%. Thanks to the leverage and the low cost debt, Cenovus equity is trading at only about 4.4x cash available for distribution.

Also impressive is the level of FCF conversion; out of $2.3 billion CAD in adjusted funds flow, $1.7 billion is "free" (in excess of capital expenditure), which is 72%. Management's comments on further uses of cash flow in the Q3 conference call:

We finished the third quarter with net debt of about $11 billion, a reduction of $1.4 billion since the end of the second quarter. And today, we are very close to achieving our interim net debt target of below $10 billion, which takes me to our shareholder returns announcement. We have been clear that increase in shareholder returns would be our first priority, upon reaching our interim net debt target. Delivering on that commitment, our Board has approved doubling the dividend on our common shares effective for the fourth quarter dividend to $0.14 per share. In addition, the Board has approved filing of an NCIB application with the TSX for share buyback program of up to about 150 million common shares, which we expect to commence following the achievement of net debt below 10 billion. We will provide more context on how we think about capital allocation at our virtual investor day on December 8th. However, as we have said previously, when we are below 10 billion net debt, you should expect to see a more balanced approach to free funds flow application between further de-leveraging and shareholder returns. And at current commodity prices, we would expect to be able to execute our buyback plan in 2022, while achieving net debt under eight billion around mid-year

Canadian oil companies just seem unbelievably cheap. I do not understand why anyone is buying cryptocurrencies or the Robinhood bubble stocks when there are cheap pipelines, oil companies, tobacco companies, and banks. Capital markets have a good $5 trillion of worthless securities and coinz bouncing around. For that price, you could buy the entire energy industry, pipeline industry, tobacco industry, and community bank sector.

No comments: