CVE’s Q2 operating results confirmed our view that the risk/reward on betting on
a large beat, particularly on the downstream side, vs. guidance
The company concluded its Telephone Lake strategic process without a transaction rather than just reiterating that things are going slow. These two events are what caused the selloff in the stock, in our view; and as a result we see a good buying opportunity due to the following:
1) Oil sands development continues to gain momentum; but ignored by the market. Both Christina Lake and Foster Creek have demonstrated the ability to produce beyond stated capacity. Construction on Christina Lake Phase D is moving faster than scheduled, with first production now expected in Q3/12 vs. the previously guided Q4/12 date.
Additionally, future optimizations at Christina Lake and Foster creek continue to help further push the limits of these projects. We
estimate that these optimizations/accelerations add ~2 % to CVE’s NAV (on a 10% NPV basis). However, this was ignored by the market.
2) There appears to be another one-time item in the EPS number, which when excluded puts Q2 results in line with the Street’s: Q1/12 EPS (clean) at first glance appeared to be roughly $0.43/share (before a tax-adjusted one-time exploration expense of $68M), missing the Bloomberg consensus average of $0.53/share (as of 7/24/12). There was also a one time adjustment to U.S. tax estimates, which impacted earnings by roughly another $0.07/share. Excluding this, Q1/12 EPS of $0.50 was essentially in line with the Street.
Our target price is based on 6x our 2013 ex oil sands and downstream DACF estimate, 5.5x 2013E downstream cash flows, plus almost $28/share of combined estimated risked net present oil sands and Bakken/Lower Shaunavon value.