Cenovus Energy (CVE.TO)

$8 billion in debt, and at this oil price, the numbers don’t work. Profitability doesn’t work. This year is $8 billion of debt and next year $9 billion and next year is $10 billion and profitability is not there. Oil has to go to $60, which is the problem. This is too volatile for him.

In the 1^st quarter, they made most of their profits from their risk management side. Made $187 million from their hedge book, and their foreign exchange gain was $76 million, so there is about $263 million there. However, net earnings was only $211 million. They did an acquisition, and one negative was the stock issue they did, which is still down below here. BV is $11.49, so there is still a bit of downside.

Feels there is going to be a large overhang on this company for some time. They did a deal with Conoco (COP-N), issued a whole pile of stock and took on a whole pile of debt. That is really the inverse of what he would be looking for. There will continue to be an overhang with Conoco Phillips getting upside. If there is any oil appreciation, they are going to continue to get upside. However, $16 down to $12.80 is a nice downdraft, so you could almost argue that most of that is baked in. If they started to pay down the debt, that would be a really good sign.

A really good time to be taking a look at this, because it is a great contrarian play. They stretched to make their acquisition and have to make dispositions of assets. Probably took on a little more debt than they probably might otherwise could, and diluted the equity down. That asset sale aspect is troubling at a time when oil prices are $45. Who are you going to sell those assets to.

It is now back almost at the lows of early 2016. The oil and gas sectors are getting cheap again and he is starting to buy, but we could see further weakness. We could see oil prices cooling off and heading back to $40. Use caution. He is nibbling and accumulating. The M&A activity with CVE-T is interesting. He is not worried about it, but the market thinks it is an issue.

Just put forward a massive acquisition of $17 billion into the oil sands, a significant size relative to their market cap. Maybe this is not a bad time for these companies to be buying out these assets. Thinks that it is a stretch for them. He owns this because it has such a great sheet. After this acquisition, the balance sheet is not going to be that great. Also, it is going to be exposed to oil sands which are very, very long-term assets. Costs of getting oil out, are coming down, so this could be a buy of the century for them, but could also go the other way.

Recently acquired some Conoco Phillips assets. Feels the stock fell because they are paying a pretty full price, and have levered up their balance sheet. It went from a pretty under-levered company to a much higher leverage ratio than their peers. If you are very long-term focused, this is probably an attractive entry point. You do have to believe that crude oil will stabilize and slowly move upwards. There is not a lot of visibility on crude oil near term because there are so many uncertainties right now. Hopefully we have seen the lows.

This company did 2 things. They added a ton of debt, which didn’t go well. (They were at $6.3 billion of debt at the end of December.) They added $10 billion of debt with their financing. They are now at $16 billion in debt. Their equity component was $11.6 billion and is now $18 billion with the equity issue that they did, plus the stock they gave to do the deal with Conoco. The problem is, BV is $13.91. Stock was trading at $16-$17 in January. The issue broke $16 and now is coming down. The low in Q1 of 2016 was $12.60, and he thinks it will go below BV at the end of Q4. The negatives are the balance sheets and that they are now going back to create Pan-Canadian. If the price gets down to $12-$13, he may start to do some work on it, because at that point it will be very cheap.

They’ve taken on quite a bit of debt on their deal with Conoco Phillips, and the market reacted, dropping the stock price about $1 below where they issued new equity at, and have gone from the best balance sheet to now arguably the worst. It didn’t really move the needle for free cash flow. Their motivation was right in consolidating some of the best oil sands assets in Canada, but they had to include about 40% of deep basin gas and conventional oil. They want to sell some non-core assets and maybe generate about $3.5 billion. He would start to pick away anywhere in the low $14 range, but would wait until there was some clarity on the disposition package. Prefers Canadian Natural Resources (CNQ-T).

Acquired the oil sands and deep basin assets from ConocoPhillips last week, and doubled the size of the company. Acquired about 300,000 barrels a day of production. However, it is an $18 billion deal, and the market didn’t react very well, probably on concerns of balance sheet risks. Although constructive on Canadian energy, this would not be his preferred choice in the space.

It is a big transaction. If you liked it before this deal then you have to like it now. They doubled the size of their production. They are responsible for the weakness in energy today. It is probably a buy right now. It was short prior to this (16 million) but some are probably recovering now. Since the transaction, the index funds will have to own 20% more of this stock.

She does not want to own it. The balance sheet does not look all that healthy. There may be lots of opportunity to own it over the next 6-12 months.

They are doing an equity issue and it is priced about 8% below the close today. He thinks we will see oil prices lower as inventories build. We are starting to see a trend of foreign companies selling off their oil sands assets.

A good company to be invested in at this time. She likes the prospects in the $60 plus range. They have a lot of torque to the upside. They may do something with their cash on hand and that could be a catalyst. They have a pretty solid balance sheet.

This is a good company. There is nothing wrong from a fundamental perspective. Good management and good assets. We are in a range bound market, and this is going to be a company that is stuck. It doesn’t have any identifiable catalyst for the upside, but it isn’t a bad company.