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We See Tremendous Long-Term Opportunity in Oil Sands

Cenovus Energy remains our top pick among the subsector.

Securities In This Article
MEG Energy Corp
Canadian Natural Resources Ltd
Cenovus Energy Inc
Imperial Oil Ltd
Suncor Energy Inc

We are substantially lowering our fair values for the Canadian oil sands producers and integrated companies: MEG Energy MEG, Cenovus Energy CVE, Imperial Oil IMO, Canadian Natural Resources CNQ, Suncor Energy SU, and Husky Energy HUSKF . We expect lower netbacks across the board in the upstream segments as a result of lower pricing on all crude streams and higher costs due to lower production levels. In the downstream segments, we are forecasting lower refining margins in the near term.

Beyond 2021, we would still expect robust demand growth as disruptive factors like electric vehicles will take much longer to meaningfully reduce global crude consumption (see EVs, AVs, and Ride-Hailing: Gauging the Impact on Long-Term U. S. Gasoline Demand and Vehicle Ownership). Yet U.S. shale would be the cheapest source of incremental supply, and it has a marginal cost of $55/bbl for WTI. Prices must therefore recover to incentivize this expansion, or the glut will flip into a painful shortage. With the massive sell-off in the Canadian energy space, we see tremendous upside across the oil sands subsector, as we think the market is overlooking the long-term cash flow potential.

Best Idea Cenovus Energy remains our top pick among the subsector. We are lowering our fair value estimate for no-moat Cenovus Energy to $8 (CAD 11) from $14 (CAD 18). Despite the tremendous price cut, the stock looks highly oversold, and we still see tremendous upside in the stock. However, we expect the current market conditions to overhang the stock until the market can become comfortable with oil sands growth.

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About the Author

Joe Gemino

Senior Equity Analyst
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Joe Gemino, CPA, is a senior equity analyst for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc.. He covers Canadian oil and gas companies.

Before joining Morningstar in 2015, Gemino held equity analyst roles for Goldman Sachs and Gate City Capital Management. Before business school, he was a technical accountant for Citigroup and Northern Trust.

Gemino holds a bachelor’s degree and a master’s degree in accountancy from the University of Notre Dame along with a master’s degree in business administration from the University of Chicago Booth School of Business. He holds the Certified Public Accountant designation.

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