Cenovus Energy (CVE.TO)

This is really out of favour, but in their last quarter they really surprised the street with a big tax rebate and a few other things that really helped boost their numbers. Longer-term, this is probably a good name, but still probably a “no touch” for 6 months to a year. Thinks the worst is over, but it may take a while for it to start reacting again.

He would stay away. Just reported with $.71 in cash flow versus $.53. The problem is, $13 billion of debt against $18 billion of equity. They are trying to sell $4-$5 billion of assets to get the balance sheet in line. The only buyers are a few Canadian companies. This company was doing very well in thermal, but by going in and trying to be Pan-Canadian again, getting into the conventional oil/gas business, the market is skeptical and the stock is going to go much lower.

They made an acquisition, and everybody thought they overpaid. Now they have a balance sheet problem, so before you get involved, wait to see what they dispose of and how much they get for it. She wouldn’t rush into this until they fix the balance sheet a little.

The chart is not looking too good. There is a distinctive trend down. It may be trying to form a base, showing an early sign of bottoming. You want more than just early signs. Seasonally these stocks do well from January to April.

Cenovus Energy (CEV-T) or Algonquin Power (AQN-T) for long-term gains and dividends? All interest sensitive stocks in a rising interest rate environment tend to pull back, especially so in a sharply rising rate environment, which she does not anticipate in Canada. If we get these pullbacks and high-quality utilities, it is a good time to get in. If you want yield, Algonquin Power is definitely the stock to get into. This one is an energy oil sands producer, whose cash flow is going to be largely predicated on what crude oil does.

This has been particularly hit with the acquisition they made, which they had funded with debt, and now have to figure out what to do with the assets they have to sell. As crude prices come down, the value of the assets they had hoped to sell, isn’t what it used to be. Be wary of companies that have too much debt. There are a lot better plays in the oil patch with a relative higher risk/reward.

$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).