Ryan Bushell

I was recently quoted in the Globe and Mail in an article that examined Cenovus Energy, our largest holding in the energy sector.  you can read the article here: http://www.theglobeandmail.com/globe-investor/investment-ideas/cenovus-a-top-tier-stock-at-a-modest-price/article17390266/

Most of my quote centered around Warren Buffet’s well publicized purchase of Suncor mid last year that propelled the shares to a 16% total return last year relative to the rest of the Canadian integrated energy space which averaged only 8% (Cenovus had a -6% total return in 2013 which was the worst of the 4 major Canadian integrated producers).  Now Suncor also increased its dividend significantly and made operational progress, which helped, but largely I believe that boost in the shares was fuelled by the news of Buffet’s purchase… and that’s a great thing looking forward for the Canadian energy space and including Cenovus.

Buffet is not your typical investor in the energy patch.  He is focused on tangible assets that produce free cash (money the company makes after all expenses are paid) today,  no matter which industry he is investing in.  The energy industry is more used to investors/speculators that pay for anticipated future growth in production today, with little focus on current cash generation.  This misalignment of objectives has led to many companies that over promise in the present and under-deliver in the future.  Buffet’s investment in Suncor brought renewed focus to steady cash flow generation that can last decades in the energy sector, which is what oilsands is all about.  US investors had all but abandoned the Canadian oilsands in favour of domestic shale oil producers, over the past few years because of the high current and potential growth rates of shale oil producers along with an anticipated drop in the Canadian dollar.  I examined the problems with this thesis in detail in an earlier blog post, but suffice it to say that Buffet’s investment was a big vote of confidence for Canadian oil producers by a respected investor.  I just think he bought the wrong company for the long haul.

Cenovus’ has lower cost production than does Suncor and has no exposure to costly bitumen upgrading from mining operations.  Cenovus’ refining assets are more tightly integrated with their production as their joint venture with Conoco Phillips allows them to have refining assets that are specifically set up to run their blends of crude oil (both companies participate in upstream/downstream success).  Cenovus has much better production growth prospects going forward than does Suncor and has a management team that has established a track record of bringing projects on in phases that routinely come in on budget and on schedule.  Lastly Cenovus’ management team has expressed confidence to their shareholder base by paying an increasing dividend that is currently 3.6% (44% larger than Suncor at 2.5%).  So what’s missing?  Because of Cenovus’ large suite of undeveloped projects they are currently spending more than they are making, so they are free cash flow negative at the moment.  This is set to change in the back half of this decade (2016-18) as long as the company remains on schedule and commodity prices cooperate.  In this rare case we have found an investor (Buffet), that is more conservative than we are in this specific instance, but given we are getting paid a 44% premium to Suncor to wait for what we believe to be a better overall prize, we feel we can afford to be patient on behalf of clients.

The oilsands are a compelling multi-decade investment opportunity but progress is slow, occasionally the market will chase other shinier things, presenting buying opportunities. Buffet understands all of this and so do we.  We believe strongly that Cenovus is the best risk/reward trade-off in the space today, Buffet likes Suncor, but bottom line we have more in common when it comes to this decision than we disagree on.  Time will tell… it always does


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