Analyst Note| Joe Gemino, CPA |
We are increasing our fair value estimate for no-moat Cenovus Energy to $8 (CAD 10.50) from $6.50 (CAD 9). Our higher fair value is driven by increased near-term commodity price forecasts along with an increase in our long-term U.S. Gulf Coast pricing for heavy oil. Trading near $6.50 (CAD 8.50) per share, we see nearly 25% upside in the stock. We think the market underappreciates the company’s long-term cash flow potential. We think that Cenovus’ best-in-class supply costs will enable it to generate enough cash flow to reshape its balance sheet and position itself for growth once new pipes are built. The company's conversion to its solvent-aided process should further decrease supply costs and drive increased netbacks, even without pipeline expansion.