Morningstar | Lowering Cenovus' FVE, but Long-Term Thesis Is Intact; Stock Is Deeply Undervalued
We are lowering our fair value estimate on no-moat Cenovus Energy to $14 (CAD 19) from our previous estimate of $16 (CAD 21) to reflect a slower ramp-up of its SAP technology and lower near-term commodity price forecasts. However, our long-term thesis remains intact. We believe the market is too narrowly focused on the company's temporary decrease in netbacks and overlooking the immense growth potential in its oil sands reserves that can be brought on line with solvent-aided process technology.The stock is down 30% in the past six months, driven by lower crude prices, widened heavy oil differentials, and concerns about future market access. We continue to caution investors that the stock is likely to face pressure until there is more certainty regarding pipeline expansions and long-term price differentials. We also remind investors, though, that these assumptions are already priced into our model, and expect lower price realizations over the next few quarters. However, we expect the heavy oil discount to narrow as producers take advantage of rail options in 2019 and pipeline expansion projects are placed into service, beginning with the Line 3 replacement project in early 2020. Once the discount narrows, we expect the company to begin its industry leading, solvent-assisted technology growth projects.
Furthermore, we are maintaining our no-moat rating.
For a deeper look into Cenovus and its upside, please see our October 2017 report "The King in the North: Cenovus Energy."
Cenovus Energy is in the business of development, production and marketing of crude oil, natural gas and natural gas liquids ("NGLs") in Canada with refining operations in the U.S. Co. operates in two business segments: Upstream, which includes Co.'s development and production of crude oil, NGLs in Canada, is organized into two operations: Oil sands and conventional; and Refining and Marketing, which is focused on the refining of crude oil products into petroleum and chemical products at two refineries located in the U.S. This segment also markets Co.'s crude oil and natural gas, as well as third-party purchases and sales of product.
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