EUR 850.00 For Business Accounts Only

Morningstar | Cenovus' Upside Hinges on Pipeline Expansion

Cenovus Energy operates as an integrated oil company, focusing on oil sands development. Conventional crude oil, natural gas liquids, and natural gas production, coupled with refining operations, supplement the company’s core operations.Oil sands projects have long been characterized by high capital requirements and production costs, and Cenovus is not immune. Consequently, most expansion projects aren’t economical at $55 per barrel of West Texas Intermediate and struggle to compete with other global supply sources. However, it appears that Cenovus has found its solution with its solvent-aided process, or SAP, which holds the potential for the lowest-cost oil sands production in the industry. We expect the implementation of this technology, albeit not for another few years, to provide Cenovus with the cost savings needed to be competitive with other marginal supply sources and generate free cash flow in a $55/bbl environment. Based on our analysis, the solvent-aided process could eventually be the lowest-cost oil sands production, with most potential production having break-even prices around $45/bbl WTI. Cenovus' recent acquisition of the remaining interest in the Foster Creek Christina Lake Partnership provides the company with additional opportunities to showcase its industry-leading cost structure for years to come. We expect Cenovus' solvent-aided process to drive meaningful value in the long term while improving the company's balance sheet. While significant oil sands growth is a few years away, we think the market is too narrowly focused on the company's temporary increase in leverage and vastly underestimating the long-term potential of solvent-aided production. As such, we believe the stock is deeply undervalued and presents an attractive opportunity for long-term investors.