An Attractive Opportunity in Oil Sands

Joe Gemino: Although oil sands' costs have drastically decreased over the past two years, most expansion projects nonetheless aren't economic at $55/bbl WTI, our midcycle forecast, and thus struggle to compete economically with other global supply sources.

However, it appears that Cenovus has found its own solution via its Solvent Aided Process (SAP). Based on our analysis, Cenovus' SAP has the potential to eventually be the lowest-cost oil sands production, with most potential production having break-even prices around $45/bbl WTI. Furthermore, Cenovus' recent purchase of the remaining interest in the Foster Creek Christina Lake Partnership provides the company with ample resources to showcase its technology. However, the stock is down nearly 20% since news of the deal broke. We believe that the market is basing its conclusion on the current extraction cost structures and overlooking SAP as the catalyst needed to tap into the vast resource potential with industry-leading break-evens.

With its 4-star rating, Cenovus is on our best ideas list and our best pick among our Canadian integrated stocks. We recently awarded the stock a positive moat trend and raised our fair value estimate to CAD 23 ($18) per share from our previous estimate of CAD 18 ($14) per share. The stock is currently trading at a 35% discount to its fair value estimate, while on average, the industry looks fairly valued.

We believe that the market is overlooking the immense growth potential in the company's oil sands reserves that can be brought on line with low-cost SAP technology, including opportunities associated with the company's recent acquisition. Consequently, we believe that the stock presents an attractive opportunity for long-term investors.