Cenovus shareholders set for another good year, even if oil prices remain static

Cenovus shareholders set for another good year, even if oil prices remain static

Canadian energy stocks have retreated since early November, weighed down by stumbling crude oil prices and economic uncertainty.

But there’s good news for dividend-focused investors here: The hefty distributions that have flowed from the energy sector in 2022 should continue to delight shareholders next year as well, even if the price of oil fails to embark upon a fresh winning streak.

Jason Bouvier, an analyst at Bank of Nova Scotia, took a closer look at Cenovus Energy Inc. and found that the oil producer’s annualized distribution of about $800-million a year – or 42 cents a share – has plenty of room to rise.

He estimated that the total base distribution could increase to a range between $1.2-billion and $1.4-billion a year, even if oil prices slide further to about US$50 a barrel.

This distribution increase, even if it takes a few years, implies a dividend hike of 50 per cent to 75 per cent from the current level. That will give a lift to the modest dividend yield sitting below 2 per cent right now and it could bring the stock in line with energy dividend powerhouses such as Suncor Energy Inc. and Canadian Natural Resources Ltd.

Mr. Bouvier said in a recent research note that with oil prices at about US$75 a barrel, which is close to Tuesday’s price of about US$76, investors can do significantly better.

At that price, according to the analyst’s estimates – which include some assumptions for the discount of Canadian heavy crude oil compared with the U.S. benchmark, West Texas Intermediate (WTI) – Cenovus is capable of generating cash flow of $10-billion to $11-billion a year.

Subtracting $5-billion from the middle of this range for capital expenditures and other expenses leaves about $5.5-billion in free cash flow. This fountain of cash can provide the current dividend and another $4.7-billion for other shareholder returns.

“Even after the base dividend increase, we expect significant available free cash flow for both share buybacks and additional dividends,” Mr. Bouvier said in the note.

The stock might not be reflecting this dividend-friendly outlook.

Cenovus shares have been underperforming the broader energy sector in recent weeks, falling nearly 15 per cent since early November, amid broad concerns over the economy and commodity prices. Earlier this month, crude oil fell to its lowest level in about a year.

In its 2023 lookahead, analysts at Credit Suisse argued that the energy sector – by far the best performer in North America in 2022, with the S&P 500 energy sector up 53 per cent this year – will struggle next year as producers not aligned with OPEC (the Organization of the Petroleum Exporting Countries) increase supply as demand slows with the slumping global economy.

U.S. economic growth, Credit Suisse said in its lookahead, “will generally remain low in 2023 against the backdrop of tight monetary policy conditions and the ongoing reset of geopolitics.”

Nevertheless, the analysts’ 2023 year-end target price for WTI is US$80 a barrel – compared with a brief peak above US$100 in June – suggesting that even cautious economic forecasts can underpin a bullish scenario for Canadian energy producers such as Cenovus.

Some analysts expect oil prices will rise higher.

Michael Hartnett, an investment strategist at Bank of America, estimates WTI will trade at an average of US$94 a barrel in 2023, and rally to a peak of US$104 a barrel in the third quarter, as China’s economy rebounds from its current slump.

No doubt, Canadian energy stocks could be volatile as markets react to everything from inflation readings and economic activity to the war in Ukraine, in a year that is bound to be full of surprises. And yes, the price of oil can be unpredictable, making a mockery of forecasts.

But Cenovus – and, more generally, the energy sector – is not reflecting a particularly upbeat future for oil right now. Share prices are well off recent highs, suggesting valuations are anything but stretched.

The best part: The bullish case for dividend investors doesn’t rest on the return of sky-high crude oil prices.


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