English: This map shows the extent of the oil sands in Alberta, Canada. The three oil sand deposits are known as the Athabasca Oil Sands, the Cold Lake Oil Sands, and the Peace River Oil Sands. (Photo credit: Wikipedia)

Cenovus Energy Inc. 
CVE : TSX : C$31.15  Buy , Target C$44.00

July 26
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.