Cenovus Energy (CVE.TO)

(Past Top Pick Sept. 22, 2017, Down 6%) He bought is because he saw a real restructuring story. It was beaten up and he felt new managers would solve those problems. They are slowly doing that like getting rid of some assets and it will work out in the end.

(A Top Pick October 3/17 Up 1%) He did sell this back in late-May when it became apparent a refinery shutdown was going to cause differentials to blow out in the fall. Still a good company, but having cut the dividend to less than 2%, there are better options now.

It has been a tough energy call. He thought it was cheap enough after their acquisition and the stock got hammered, but the rally petered out. He got out. Cash flow is not really there. It is lining up as a short if he sees more weakness.

He sold it this year, because he was reducing his energy weighting. New managers have done well selling assets to reduce debt. Have also lowered costs. They don't have the refining capacity, so that's a problem. By 2020, the debt should be low enough to increase the dividend, though he had been expecting 2019.

The company has over $9 billion of debt against $19 billion of equity. He would stay away. Heavy oil differentials are problematic. Book value is $15 per share. He thinks the stock is susceptible to further selling pressure as oil prices are expected to drop below $60 soon on a seasonal basis.

It is down 15% in the past month, due to widening heavy oil differentials. With more rail capacity coming, it will support differentials near WTI less $23 – he is using $20 in his models. They are paying down debt and he thinks the worst is behind them. When stricter sulphur limits are imposed on marine fuels in 2020, he estimates this will have a $5 worsening impact on heavy differentials. However, he thinks this will ultimately lead to higher oil demand globally and higher oil prices.

Turnaround in progress. Integrating cost-cutting. New management has right-sized the ship. Risk is high exposure to WCS Canadian discount. But if oil prices continue to move higher, cash flow will benefit, they’ll pay down debt, and be in a good position going forward. Share pullback has created a good entry level. Yield is 1.7%. (Analysts’ price target is $17.08.)

Seasonal from Feb.25-May 9 where it had a good run; and starting July 27. Seeing flatlining now. Wait a bit.

He does not have kind thoughts on it. It is cheap relative to good will. The debt is 50.4%, not overwhelming, but it is rising. He thinks they need to decide if they are just a thermal oil player or conventional. You can't be both. Sty away.

He likes the sector. Heavy oil play can make some sense. The balance sheet is worse than most players in the sector. Growth is lower than competitors. He has a bias towards the entire sector. A rising tide might lift all boats.

Large caps will underperform the mid-caps. This one is different because of the high leverage to oil. As a large cap liquid name if you are bullish in oil ($65 or higher), okay but otherwise look at WCP-T.

He's added to his position. The market didn't like them buying Conoco's assets (overpaid); they took on a lot debt. But the new CEO has done well cutting costs. They've been hit by the WCS differential. This has a lot of room to move higher, levered to a higher oil price. De-leveraging will happen quickly with rising oil prices. This week's oil pullback is a buying opportunity. (Analysts' price target: $16.27)

Had there been 4 top picks this would have been the fourth. He really likes it. They bought Conoco assets last year. The street didn’t like the deal and lost confidence in Management. They have new Management now with a new CEO that is on the path of right-sizing the company and its balance sheet. It is looking really well now, particularly if we go to a 80 – 90 dollars barrel of oil.

(Past Top Pick on Oct. 3, 2017, Up 10%) Oil prices are up and he's positive energy. With a new CEO, he likes their new direction. He's been with this since its bottom (he averaged down). Has great long-term assets. But they've enjoyed a great run for the past six months so he may exit.

The story is turning around here. He is modeling 55% cash flow growth 2018 to 2019. Trades at 5 times 2019 cash flow which is reasonable. The problem here is their balance sheet is 3.5 times debt to cash flow. This will come down if oil prices stay at these levels. A name you can own if you like oil.