With the stock market trading at record highs these days, it may seem like an overwhelming task to find undervalued stocks that will provide you with double-digit profit.
Consider looking to the oil and gas sector for this — a sector that has been relentlessly beaten up due to a lack of Canadian infrastructure, highly volatile oil prices, and persistently weak natural gas prices.
But through all this, we have seen many oil and gas stocks emerge from 2018 rising sharply from their lows, as the Canadian energy industry receives a life-saving raft from the government of Alberta in the form of production cuts aimed at driving Western Canadian Select oil prices higher.
And this has had its intended effect, with Western Canadian Select oil trading today at $54.55 (up from below $15 in December 2018) and a much narrower differential of roughly $10, with Canadian energy companies reaping the rewards through increased cash flows and income.
Cenovus Energy (TSX:CVE)(NYSE:CVE) just reported first-quarter 2019 results that showed sharply higher adjusted fund flow of $1 billion (compared to negative $41 million in the same period last year) and net earnings per share of $0.09 (compared to a net loss of $0.53 in the same period last year).
Cash flow, cash flow, and more cash flow The remainder of 2019 will continue to see the same challenges, as crude-by-rail continues to increase, and as we await the necessary pipeline extensions and additions.
But the effect that these curtailments have had on Canadian oil prices has more than offset the lower production.
As of today, the second quarter continues to bring Cenovus strong oil prices.
If things continue like this, we can expect to see another very strong quarter for Cenovus. And as we continue to see these challenges melt into the background, investors will be able to focus in the strong value story that Cenovus presents to us.
Because Cenovus still has big upside, and for those contrarian investors that are willing to continue to be patient and that can maintain nerves of steel, this additional upside can be realized in time.
Long term, the $17.7 billion acquisition of assets from ConocoPhillips (NYSE:COP) in 2017 has served to dramatically increase Cenovus’s production profile and drive strong cash flow growth.
As free cash flow ramps up through to 2020, we can expect to see increasing dividends, debt reduction, and more share buybacks — all catalysts for strong performance for Cenovus stock.
Final thoughts As we have seen in 2019, Canadian energy stocks remain relevant, as the energy sector is a very essential part of the Canadian economy. We have every reason to believe that these lows will continue to be good buying opportunities and easy ways to make double-digit returns.
Fool contributor Karen Thomas has no position in any of the stocks mentioned.
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