Shares of oil and gas company Cenovus Energy (TSX:CVE)(NYSE:CVE) are down a whopping 24% in just
the past month. With oil prices starting to fall of late, so too has the interest in Cenovus. Historically, its
share price has been closely aligned with the movement in oil prices. West Texas Intermediate (WTI) is a
key benchmark in the industry, and its prices have been declining rapidly; a month ago, it was at more
than US$120/barrel and now it is close to just US$100/barrel.
The implications for Cenovus is that as oil prices fall, its revenue will decline. That, in turn, hurts
profitability and can impact its attractiveness as an investment. Plus, it may eventually put pressure on
its dividend, which currently yields 1.8%.
Despite its recent losses, the stock has still risen by 50% year to date. It’s been an even better buy than
top oil and gas stock Exxon Mobil (NYSE:XOM), which has increased by 41% in value. Both stocks have
benefitted from higher oil prices due to the war in Ukraine along with global economies opening up and
stronger demand for oil this year. However, investors need to tread carefully with Cenovus because its
shares can be incredibly volatile; in 2020, they fell by more than 40%.
Today, the stock trades at 28 times its earnings and isn’t a terribly cheap buy anymore. The risk is that
with WTI still relatively high at US$100/barrel, there’s more risk that oil prices decline in the long term
than there is potentially that they will climb higher. And for that reason, I’d avoid Cenovus right now as
more of a decline in price is necessary for this to be a cheap stock.