Everyone seems to be looking for a great way to play a potential rise in oil prices these days. A few are simply buying ETF's such as the Energy Select Sector SPDR (ETF) (XLE 0.10%), and some are buying best-of-breed shale producers with costs low enough to wait out the downturn. While many are simply following everyone's favorite billionaire investor, Warren Buffett, into shares of Canadian oil-sands megaplayer Suncor Energy (SU).
Close-up of machinery in an oil sands mine. Source: Getty Images.
While it's hard to imagine that any Buffett investment could not turn out profitably, there's another Canadian oil-sands producer that will likely reward venturesome investors even more should oil prices continue on their current trajectory: Cenovus Energy (CVE -1.60%).
Born to focus
Cenovus happens to be the product of a corporate split. In 2009, in order to facilitate increased operational focus, Encana Corp (OVV 1.34%) was split in two: the current Encana, and Cenovus. The former's task was to focus on the development of plentiful natural gas reserves, whereas Cenovus was to focus on producing and refining crude oil as a pure-play integrated oil operation.
As of December 31, 2015, Cenovus boasted proved oil reserves -- in the form of bitumen -- of 2.2 billion barrels, plus probable reserves of 3.3 billion barrels. Cenovus produced 207,000 barrels of oil per day -- 140,320 from oil sands, 66,627 from conventional -- in FY 2015, which was just less than half of Suncor's daily production that same year of 432,000, but still respectable.
The road for Cenovus since being spun off on its own in 2009, however, has not all been smooth:
Profits have held up reasonably well for Cenovus, arguably due to increased efficiencies. In a recent investor presentation dated May 25, 2016, management noted that they expected production costs this year to come in at 30% below their 2014 levels, while G&A expenses will likely fall around 25%. Unfortunately, these moves were not enough to save Cenovus from the current travails of the oil industry.
Unfair valuation
Current difficulties aside, Cenovus trounces Buffett-pick Suncor on a number of key metrics:
| Current Price-to-Tangible Book Ratio | Current Ratio 3/31/2016 | Debt/Assets Ratio 3/31/2016 | |
|---|---|---|---|
| Cenovus Energy | 1.28 | 3.3 | 33.8% |
| Suncor Energy | 1.45 | 1.3 | 29.6% |
Source: S&P Capital IQ.
I excluded metrics like net income because of just how unusual the times we live in are. For example, one might say that Cenovus made money (CAD 668 million, to be precise) on a GAAP basis last year, while Suncor lost a whopping CAD 1.995 billion, but Cenovus' results included a gain on the sale of assets of CAD 2.39 billion. Not terribly helpful for our purposes.
Cenovus' lagging valuation seems all the more unfair when we compare the two companies' internal returns on capital:
CVE Return on Equity (TTM) data by YCharts
What we do know is that we have two Canadian integrated oil majors -- one about half the size of the other, which happens to have way more financial flexibility (as exhibited by a spectacular current ratio) than its big brother. It has also more than kept pace with Suncor's returns on capital. One would think that would garner a bit more respect when it comes to valuation these days – but that's not the case. Cenovus' massive liquidity advantage gives it a key edge to survive what has been an unprecedented downturn as well as to take advantage of any sustainable turnaround that materializes.
Foolish bottom line
Mr. Buffett's Berkshire Hathaway, with its 30 million shares of Suncor, likely made the bet out of size constraints as much as for its valuation. The purpose of this article is not to bash Suncor, an obviously well-run operation that sports a very respectable 3.2% dividend yield.
The bottom line is that Suncor sits just 35% off its all-time highs of summer 2014 -- just before oil prices fell off a cliff -- whereas Cenovus, despite its greater financial flexibility and obvious ability to hold its own, languishes some 55% below its own 2014 highs. Adding insult to injury, Cenovus has been assigned a lower price-to-tangible book multiple than Suncor.
For investors looking to invest in the continued development of Canadian oil sands, and are also willing to trade a slightly lower yield of 1.1% in exchange for larger gains if and when oil prices return, Cenovus Energy seems more than worth a look.
