The TSX is filled with a multitude of oil and gas, financial, and material stocks. For the better part of a decade, those oil and gas and material stocks have underperformed.

As a result, the Toronto Stock Exchange has significantly underperformed its US counterparts in the NASDAQ, S&P 500, and Dow Jones.

During the COVID-19 pandemic, Canadian stocks in the oil and gas sector collapsed, resulting it catastrophic paper losses for investors.

In fact, even through the entire course of 2020, producers like Cenovus (TSE:CVE) and Suncor Energy were still deep in the red.

Looking forward, many investors are now wondering if a company like Cenvous, which is still trading well below pre-pandemic highs, is the best bargain in the oil and gas market right now.

Well, lets have a look.

What exactly does Cenovus Energy (TSE:CVE) do?

Cenovus is an "integrated" oil company here in Canada, for those new to the sector or just learning how to buy stocks, this means that the company has upstream, midstream, and downstream operations.

In layman's terms, the company produces, ships, refines, and sells oil and gas products.

In 2020, the company produced on average 472,000 barrels of oil a day. However that production level is likely to change in 2021, as a significant merger was announced between Cenovus and another major oil company here in Canada.

The Cenovus/Husky merger made the company one of the largest producers in Canada

In late 2020 Cenovus and Husky agreed to an all stock transaction that would see the companies merge. The combination of the two companies boosts Cenovus's overall production to nearly 750,000 barrels a day, making it the third largest producer behind only Suncor Energy, and Canadian Natural Resources.

The combined companies also have total reserves that exceed 8.4B barrels of oil, and reserves have a 30+ year timeline.

The company generates the vast majority of its production (75%~) from the Oil Sands, with the remaining coming from conventional, and off shore drilling.

When we look on the refining side of things, Cenovus has 5 refineries south of the border and a single refinery in Lloydminster Alberta.

Efficient production profile and strong capital allocation make Cenovus an attractive option

With a break-even price of $36 a barrel in 2021, Cenovus is one of the lower cost producers in the industry. Canadian Natural is closer to the $30 mark, but at the current WTI prices we're seeing, Cenovus will still be generating a significant amount of free cash flow.

In fact, the company is expected to produce one of the best free cash flow yields out of all major producers in 2021.

In terms of capital allocation, there was a lot of oil and gas companies that learned their lesson in 2020. The collapse of crude oil due to the pandemic sent many companies to the brink of bankruptcy. Most that survived are now allocating capital towards deleveraging and strengthening their balance sheets.

Cenovus is no different. In fact, the company states that all free funds flow in 2021 will be directed towards deleveraging until the company is at $10B in net debt. As of its most recent quarter, it sits at around $12.4B.

The debt reduction by Cenovus will not only allow it to make more strategic investments with future use of capital, but will also better prepare itself for a future correction in the price of crude oil.

In general, Cenovus is largely being ignored, which may lead to an opportunity

If you head back to the top of the article and look at the performance chart, there is two things that are clear.

For one, Canadian Natural is yet again Canada's best performer and has been over the last decade, and in terms of blue-chip stature, likely will continue to be going forward.

Secondly, Suncor and Cenovus have struggled significantly. A key factor in this underperformance is that both of these companies cut/suspended their dividends. For an industry that has not done much in terms of capital appreciation, the dividend is an absolute must.

However, Cenovus has re-instated the dividend, and the company also provides some of the best upside potential out of these 4 major oil producers. In fact, most analysts have placed more than 56% upside on the stock at the time of writing.

Investors could be ignoring Cenovus and instead sticking to major producers that kept the dividend in check during the pandemic such as Canadian Natural Resources, and Imperial Oil.

But, there might be strong upside here in the producer, especially with the potential synergies of the Husky merger. The company is a low cost producer on a mission to strengthen its balance sheet moving forward which should help the company the next time oil takes a hit, which is exactly what we like to see.