Cenovus Is a Steal
We think the market is overreacting to the news of lower first-quarter production.
Cenovus Energy (CVE) announced that first-quarter oil sands production has been operating at lower levels with the widening of the heavy oil discount, which has averaged nearly $27 per barrel. Management now expects first-quarter production of 350-360 thousand barrels of oil per day but reiterated that it expects to meet its 2018 annual target of 364-382 mbbl/d. We are lowering our 2018 oil sands production forecast to 367 mbbl/d from our previous forecast of 376 mbbl/d.
Despite this, we are maintaining our CAD 21 fair value estimate. Because of changes in foreign exchange rates, we are lowering our U.S. dollar-denominated fair value estimate to $16 per share from $17. Cenovus’ stock traded down on the lower production news and currently sits well below our valuation. We think the stock could retreat even further if oil prices decline later in the year, as we expect them to do, and as a result of increasing near-term leverage and the heavy oil discount remaining at high levels.
Joe Gemino does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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