Billionaire Stanley Druckenmiller is renowned for his investing prowess, and he’s made some savvy calls over the years. So it was worth paying attention when his family office picked up just over a million shares of Cenovus Energy Inc. (NYSE:CVE).
Why would Druckenmiller might be interested in this Canadian oil producer and does it makes sense for investors to follow his lead?
What Is Cenovus Energy Inc.?
Cenovus Energy is a Canadian oil producer founded in 2009 after EnCana Corporation split into two companies. Cenovus Energy focuses on developing oil sands projects in the province of Alberta and also has significant conventional oil and gas operations in the same region. Headquartered in Calgary, Alberta, the company has about 2,300 employees and operates in areas including the Montney, Christina Lake, and Deep Basin.
The company has a history of innovation, including using steam-assisted gravity drainage (SAGD) technology to extract oil from heavy oil sands. Cenovus was the first company to commercialize SAGD in the oil sands, and its operations have been described as some of the most efficient in the world.
The company is also a leader in environmental, social, and governance (ESG) initiatives among oil and gas producers. Cenovus, along with Suncor Energy Inc. (NYSE:SU), Canadian Natural Resources Ltd. (NYSE:CNQ) and MEG Energy Corp. (NYSE:MEG), formed the Oil Sands Pathways to Net Zero initiative to achieve net-zero emissions from the oil sands by 2050.
How Has the Company Performed Over the Past Year?
Cenovus Energy Inc. delivered strong operating and financial results in the past year. The growth of Cenovus and many oil and gas producers in 2022 was primarily due to the war in Ukraine. The conflict between Russia and Ukraine disrupted the flow of natural gas to Europe, which led to a surge in prices and increased demand for oil. As a result, Cenovus was able to end nearly 10 years of decline.
In the third quarter of 2022, Cenovus had an operating cash flow exceeding $4 billion (up from $3 billion in Q2), with free cash flow reaching $2.1 billion. This was reflected by the company’s upstream production totaling 778,000 barrels of oil equivalent per day and downstream throughput averaging 533,500 barrels per day.
Cenovus also closed a crucial acquisition deal for the remaining 50% interest in the Sunrise oil sands project owned by BP plc (NYSE:BP). The sale consisted of $600 million in cash, a variable payment with a max value of $600 million, and Cenovus’s 35% interest in the not yet developed Bay du Nord oil field off the coast of Newfoundland.
While the acquisition was small regarding proved reserves, it significantly expanded Cenovus’s foothold in Alberta’s lucrative oil sands region. Cenovus hopes to produce 60,000 barrels daily from Sunrise, making it one of the company’s most significant operations.
The company has been working hard to reduce its overall debt. As of Q3 this year, it has decreased net debts from $8.4 billion to $5.3 billion since Q1.
For investors, Cenovus’s focus on shareholder returns was evident in its decision to declare an additional variable dividend in December 2022.
The company’s strong performance is a result of its diversified business model, which includes oil sands production, conventional assets and refining operations. This has allowed Cenovus to weather the challenges posed by the pandemic and emerge as a stronger company.
Why Did Stanley Druckenmiller Invest in the Company?
Druckenmiller uses a top-down investment strategy that focuses initially on global economic trends. This strategy may have led him to invest in Cenovus for several reasons.
Cenovus is a significant player in the Alberta oil sands region. The area has recently been a hotbed of activity due to the conflict between Russia and Ukraine. This dispute has resulted in higher prices and increased oil demand, which has benefited Cenovus and other oil producers operating in the region.
Secondly, the move to renewable energy is taking longer than many had hoped, which means that oil and gas will continue to play a major role in the global economy for the foreseeable future. The CEO of Cenovus was a part of a speaking panel in June of this year that discussed how the energy transition is more about energy diversification than moving away from fossil fuels.
Third, Cenovus has made great strides in reducing its overall debt. This is an essential consideration for Druckenmiller because he invests with a long-term horizon. By reducing its debt, Cenovus has positioned itself well for the future and increased its appeal as an investment.
Lastly, the company is a leader in environmental, social, and governance (ESG) initiatives among oil and gas producers. This was likely a factor for Druckenmiller because ESG investing will continue to grow in popularity in the years to come.
Should You Buy Shares of CVE Stock?
The answer to this question depends on several factors, including your investment goals and risk tolerance.
That being said, Cenovus Energy appears to be a well-run company positioned for long-term success. The company has a diversified business model, strong ESG credentials, and a commitment to reducing its debt. These positive factors should be considered when making an investment decision.
Of course, Cenovus is not immune to the challenges facing the oil and gas industry. As a volatile sector, there is always the possibility that future events could negatively impact the company’s stock price. However, the company’s strong performance in 2022 indicates that it is weathering the current challenges well and is poised for continued success in the years to come.
For these reasons, Cenovus Energy may be a good investment for those looking for exposure to the oil and gas industry with a longer-term time horizon.
Lastly, when we ran the number, Cenovus had upside potential to $27.39 per share, representing a 30.1% potential gain.