The Not-So-New Kid on the Oil Sands Block

07/06/2010 1:13 pm EST


Gordon Pape

Editor and Publisher, The Income Investor and the Internet Wealth Builder

Encana spinoff Cenovus boasts some of the best properties and the lowest costs in the industry, writes Gordon Pape in the Internet Wealth Builder.

Cenovus Energy (Toronto: CVE, NYSE: CVE) remains a mystery to many people. Based in Calgary, Cenovus (Latin for "new") is primarily an oil sands producer, although it also has some natural gas interests and a 50% stake in two high-quality US refineries in Illinois and Texas. Three of the company's four producing enhanced oil projects—Foster Creek, Christina Lake, and Pelican Lake—are located in Alberta's Athabasca region, where Cenovus holds approximately 800,000 net acres of existing, high-quality bitumen leases and has exclusive rights to lease an additional 600,000 net acres on the Cold Lake Air Weapons Range. The fourth key enhanced oil project is the Weyburn oilfield in Saskatchewan which has been producing since 1954 and is considered to be one of the most prolific fields in Western Canada.

A recent independent evaluation of the company's oil sands assets by McDaniel & Associates gave an estimate of total bitumen initially in place (BIIP) of 137 billion barrels. Of this, 56 billion barrels are considered to be "discovered BIIP". The company's 10-year plan is for bitumen production to reach 300,000 barrels a day, up five times from current levels (59,000 bpd in the first quarter).

Cenovus has a huge advantage [in] costs. Operating costs per barrel at Foster Creek and Christina Lake averaged $11.82 in the first quarter, a 28% decline from $16.33 in the same period of 2009, mainly due to higher production volumes and a lower level of workovers and repair and maintenance activities. Compare that to the Suncor (Toronto: SU, NYSE: SU) numbers and you immediately see why some analysts are raving about the prospects for Cenovus. Its production costs are lower than those of any of its competitors. As one brokerage analyst said during an internal conference call: "They simply have better projects." The same analyst predicted a 15% annual growth rate for the company.

Cenovus reported first-quarter operating earnings of C$353 million (47 cents per share). That was about the same as the Suncor result on a per share basis. However, the company is more generous than Suncor in its dividend, paying 20 cents per quarter (80 cents annualized) for a yield of 2.8%.

The company owns first-class, long life properties and appears to be on the threshold of an impressive growth phase. Get in while the shares are still cheap.

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