On the surface it would seem like Cenovus Energy's (NYSE:CVE) financial situation is really starting to deteriorate. Amid weakening oil prices and credit conditions the company has had to make significant reductions to its capex, dividend, and workforce. Worse yet, its staggering $4.7 billion in debt sank the company's credit rating below investment grade. While that number is important, it's not the most important number for investors right now. Instead, the number investors need to focus on is its cash balance, which stood at a whopping $4.1 billion as of the end of last year.
Cash is king
In reducing Cenovus' credit rating to junk, the rating agency cited the company's elevated debt levels, which are expected to lead to weakened leverage and interest coverage ratios due to the impact of low oil prices on its cash flow. That being said, these metrics are based on its total outstanding debt, not its net debt, which takes into account the cash on the balance sheet. That cash dramatically reduces its leverage ratio, and in fact, gives Cenovus the lowest leverage ratio among its peer group:
Not only does that cash vastly improve its leverage metrics, but it gives the company a lot of financial flexibility during the downturn. It has the cash it needs to offset any shortfall between its cash flow and its capex budget should oil prices take another turn for the worse. Further, that cash gives the company the ability to restart growth projects early on in an oil price recovery, which is not something a lot of its rivals will be able to do because they'll need that incremental cash flow to buy themselves some more financial breathing room.
A down payment on the future
That ability to restart growth ahead of its peers is a pretty big competitive advantage for Cenovus Energy. That's because the oil sands-focused company needs more time to turn its oil projects into production due to the long lead time of these projects.
At the moment, the company and its partner ConocoPhillips (NYSE:COP) have slowed the pace of development at their two producing oil sands projects, Foster Creek and Christina Lake, due to weak oil prices. However, because of its cash position Cenovus has the financial flexibility to quickly restart the next phases of growth as soon as conditions warrant. In addition to that, both Cenovus and ConocoPhillips are also partners on the Narrows Lake project, which is on hold during the downturn. However, the first phase of that project could quickly be sanctioned when prices recover because Cenovus has the cash to do so.
Beyond its joint venture with ConocoPhillips, Cenovus Energy has a number of other projects that it can begin developing as soon as conditions improve. For example, it's currently only investing a minimal amount of capital into its heavy oil operations at Pelican Lake, but could ramp up its investments into that asset early on in a recovery. Meanwhile, it has two emerging oil sands assets, Telephone Lake and Grand Rapids, that are wholly owned and could be given the green light thanks to its cash position. Needless to say, the company has no shortage of options, and plenty of cash to pursue them.
The reason cash is so important is because it gives the company flexibility. In Cenovus Energy's case, its cash position significantly improves its balance sheet metrics, thus giving it the financial flexibility to continue to not only invest during the downturn, but quickly ramp up investments when conditions improve. That's why this is such an important number for Cenovus Energy investors.
Matt DiLallo owns shares of ConocoPhillips. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.