Forgive the crude logic here, but the BP (NYSE: BP ) oil spill suggests that it may be time to consider an oil player that operates on solid ground. The Canadian oil sands are a logical place to look, given the relatively stable regulatory environment and the vast scale of the resource.
As a pioneer in oil sands development since the 1960s, Suncor Energy (NYSE: SU ) has long been the go-to name for investors in the space. Cenovus Energy (NYSE: CVE ) , a spinoff of natural-gas-focused Encana (NYSE: ECA ) , has a shorter resume but is a clear leader in the more recently developed technology of in situ extraction. Following this week's earnings reports by the pair of premier producers, I figured I'd put the firms head to head and see which is likely to give investors more bang for their buck.
Oil sands leverage
Suncor currently derives around half of its cash flow from oil sands operations, and is aiming to increase that figure to 75% in the years ahead. Cenovus' oil sands operations at Foster Creek and Christina Lake contribute about a quarter of the company's cash flow. In three years, the firm is targeting a 75% contribution from oil sands and other oil projects, combined.
Cenovus is gunning for five-fold growth in its oil sands production, to 300,000 barrels per day, by 2019. Suncor's plan is to grow oil sands production by 10% to 12% annually through 2020.
Cenovus' debt-to-capitalization ratio at the end of the second quarter was 28%, and debt weighed in at 1.2 times adjusted EBITDA. Suncor's debt to cap was identical.
Including discontinued operations, Suncor's company-wide cash flow came in at 19% of net revenue this quarter, while oil sands margins were 36%. Cenovus' cash flow margins in these categories were 21% and 38%, respectively. On a six-month basis, Cenovus' oil sands cash flow margins come out further ahead.
Slight advantage: Cenovus
While both companies are strong operators, I'm going to have to call this one in favor of Cenovus Energy. With the firms trading at roughly identical valuations on the basis of full-year production guidance, the growth outlook for Cenovus clinches this one for me.