Cenovus Energy’s Results Will Remain Under Short-Term Pressure

Cenovus Energy’s [stock_market_widget type="inline" template="generic" color="default" assets="CVE.TO" markup="(TSX: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] high-flying days have come to an end as the weakness in the oil market has affected the stock in recent months, while the refining segment has not been up to the mark either thanks to Alberta’s production cuts.

Cenovus missed Wall Street’s earnings estimates as the company faced this double whammy. Let’s see what happened with Cenovus last quarter and if there is a chance for a revival in the company’s fortunes in the future.

What’s Going Wrong at Cenovus?

Cenovus’ second-quarter performance was weaker-than-expectations on account of tepid production and weak refining margins. The company announced a 14.5% annual decline in its production to 443,318 barrels of oil equivalent per day, though this was not the biggest problem for Cenovus.

The company also said that its refining and marketing operating margins fell 45% annually to C$198 million during the quarter thanks to an increase in Canadian crude oil prices. Cenovus also struggled on account of an increase in operating costs and downtime at refineries on account of certain unplanned maintenance.

According to Cenovus’ CEO:

While curtailment has resulted in a temporary increase in per unit operating costs and steam to oil ratios, I firmly believe that the benefit of temporary curtailment for Cenovus, the provincial treasury and for our entire industry is undeniable.

The bad news for Cenovus is that Alberta’s oil price curtailments won’t be ending anytime soon. According to a recent report:

“Alberta is increasing the oil curtailment limit from 10,000 to 20,000 barrels per producer per day, and extending the program to December 2020.”

This means that Cenovus could keep struggling on account of lower refining margins as the curtailments will eventually lead to an increase in feedstock costs.

Don’t Miss the Positives

But there were a few positives for Cenovus investors last quarter. The company was able to reduce its debt during the second quarter thanks to strong free funds flow generation.

Its adjusted funds flow increased 40% annually to almost $1.1 billion. Cenovus also delivered net earnings of $1.78 billion as compared to a loss of $410 million a year ago.

More importantly, Cenovus is planning to increase market access for its oil by ramping up its crude by rail capacity to 100,000 barrels per day this year. This should allow the company to sell its product at a better price in the coming months and tackle the problem of pipeline capacity in the Canadian market.

By comparison, Cenovus transported 36,000 barrels per day of crude oil to the U.S. Gulf Coast through rail in the second quarter, up from 16,000 barrels per day in the first quarter. So the company is pulling the right strings as far as improving its long-term financial performance is concerned, though investors shouldn’t forget that the Alberta government’s measures could have short-term implications on the business.

Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.


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