Cenovus Power (TSX:CVE) is considered one of Canada’s main built-in power firms, with operations that span upstream oil and fuel manufacturing, midstream transportation and storage, and downstream refining and advertising and marketing. However with power costs ever-fluctuating, is Cenovus a great inventory to purchase now?

Let’s break down its fundamentals, latest developments, and future potential to search out out.

An built-in power enterprise

Cenovus Power produces roughly 815 million barrels of oil equal per day, primarily in Canada. Its downstream operations (720 million barrels per day) are closely U.S.-based, with 85% of its refining capability situated south of the border. These property course of about 55% heavy oil, giving the corporate publicity to cost differentials between heavy and lightweight crude.

The corporate’s reserves can assist manufacturing for round 10 years, giving it a secure base for long-term operations. Traditionally, Cenovus has delivered unstable however probably rewarding returns. Over the previous yr, its complete return has been round 9.8%. Nevertheless, its five-year return of 36.6% per yr features a dramatic rebound from the COVID-19 market correction, the place the inventory dipped close to $2 in 2020 earlier than climbing to about $23 at present. Then, there’s its 10-year return of solely 4.8% per yr, reflecting the cyclical nature of the oil and fuel trade.

Money circulation and manageable debt

Within the second quarter (Q2), Cenovus Power noticed a dip in manufacturing resulting from deliberate upkeep and wildfires close to its Christina Lake facility. Regardless of this, its downstream utilization remained sturdy at 92%, softening the impression on financials.

Listed below are the highlights from Q2:

• $2.4 billion in money from operations (down 15% yr over yr)
• $1.5 billion in adjusted funds circulation
• $355 million in free funds circulation
• $368 million paid in dividends

Its web debt stood at $4.9 billion, with a goal of $4.0 billion. Importantly, its web debt-to-funds-flow ratio was 0.7 instances, which was comfortably low and displays a well-managed stability sheet. Cenovus can fund its sustaining capital and dividend at a West Texas Intermediate oil worth of US$45/barrel, far beneath the present degree of round US$62.

This buffer permits Cenovus to return extra capital to shareholders by means of buybacks and particular dividends — a key attraction for earnings and worth traders alike.

The MEG acquisition: A daring progress transfer

Final month, Cenovus Power introduced a $7.9 billion acquisition of MEG Power in a 75/25 cash-and-stock deal. The acquisition enhances Cenovus’s present Christina Lake asset and can improve integration and growth of its oil sands portfolio.

Administration expects the deal to be instantly accretive to adjusted funds circulation and free money circulation per share, with $150 million in annual synergies within the close to time period, rising to over $400 million by 2028. Crucially, Cenovus structured the deal to keep up its investment-grade credit standing and monetary flexibility.

Notably, this acquisition would deliver Cenovus’s web debt to about $10.8 billion, implying about one instances adjusted funds circulation.

The Silly investor takeaway: Is Cenovus a purchase?

At $23.38 at writing, the power inventory trades at an estimated 15% low cost to the consensus worth goal, implying near-term upside potential of 18%. It additionally yields 3.4%, supported by present money flows.

For those who’re bullish on oil costs or in search of publicity to Canadian power with progress potential and earnings, Cenovus Power is an thought price investigating, particularly ought to the MEG acquisition be accepted (and in that case, anticipated to shut in This autumn). That mentioned, traders ought to be ready for volatility tied to commodity costs and geopolitical dangers resembling tariff adjustments. This isn’t a set-it-and-forget-it inventory — however for risk-tolerant traders, the reward potential could possibly be actual.