The Canadian banking giant boosted its target price by more than 20% on Cenovus this morning, up from $14 to $17.00. To go along with this increase, RBC has also bumped their rating from Neutral to Outperform, suggesting it sees potential in the Canadian oil producer.
Cenovus has been on somewhat of a tear recently, up 22% in the last month on the back of rising Western Canada Select prices. WCS is up over 344% since it hit record lows in November 2018 and now sits at $42.69 a barrel.
What to make of the Canadian producer
It’s no wonder that banks are upgrading their outlooks on the Canadian producer, it’s currently dirt cheap. Even with its most recent run up, Cenovus is trading at a mere 0.86 times book value and 0.78 times sales.
The Saudi Arabia supply shock has definitely helped the Canadian producer increase its stock price. The company reported in its most recent earnings report that it has generated nearly $1.5 billion in free funds flow, putting it on pace to generate close to $3 billion in FFO over the course of the year. As Cenovus has made it a priority to reduce its current debt load, the ability for the company to generate strong cash flows is a necessity.
Pipeline progress will be a huge factor in where the company’s stock price heads from here. I am a firm believer that the pipelines will get built regardless of the political party in place, but there is no doubt that a Conservative Federal government could bode well for Canadian producers like Cenovus, Canadian Natural Resources and Suncor. Conservative party leader Andrew Scheer has stated he will fast track pipeline disputes directly to the Supreme Court.
Moving forward, I would expect significant volatility from Cenovus, which is already reflected in its 3 month beta of 2.16. If you’re looking for a safer, more reliable oil and gas play to take advantage of extreme price lows, you may be wise to take a look at Canadian Natural Resources (TSX:CNQ) or Suncor Energy (TSX:SU).