Trade Alert

Brent is back above $80 per barrel. Buying Cenovus Energy

_{Posted by Club Member Ben Cap$ 24.7.23}

A friend of mine who’s an energy trader for a power company has a theory that oil prices are currently weighed down by hedge funds shorting oil futures, and that HF traders are waiting for oil inventories to come down meaningfully before turning.

I think we might be close to that turning point. Once China stimulates its economy, oil demand will pick up, and oil prices will follow. When it does, there’s a potential for a short squeeze on oil futures.

I’m thinking of initiating a new trade in Cenovus Energy.

At $80 oil, Cenovus can generate a 20% free cash flow yield, which it can either use for dividends or stock buybacks. In other words, at the current stock price the company will be generating enough cash to take itself private in 5 years!

If Oil prices move higher as described above, Cenovus’s stock will participate the same as every other oil stock. But even if Oil prices just stay where they are now, I see the markets rerating Cenovus given its tremendous free cash flow yield.

At double its current share price of $17.4, Cenovus would still have a 10% free cash flow yield, at which point it would still be a very inexpensive stock! Seems to me that the risk/reward for a trade here is very attractive.

Saw a couple of posts on energy stocks here that are a bit more bearish, so would be interested to know if anyone has a different view on this trade?

#New Ideas #Oil #Energy #Cenovus #Questions

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