• The Christina Lake and Foster Creek oil sands projects continue to set new standards of excellence—the crown jewels of Cenovus' portfolio have been highly efficient, with top-decile steam to oil ratios.

Cenovus is a vertically integrated large-capitalization energy company with upstream operations in Canada and downstream interests in the US. The bulk of the company’s operations focus on in situ oil sands development; however, Cenovus also holds a substantial amount of conventional oil and natural gas interests.

Cenovus’ asset portfolio is anchored by two best-in-class steam assisted gravity drainage (SAGD) projects—Christina Lake and Foster Creek in Alberta. The company holds a 50% operated interest in each project with partner Conoco. Both projects exhibit industry-leading steam to oil ratios (SORs), have ramped up much quicker than average and were constructed at industry-leading capital efficiencies. With additional expansion phases planned over the next several years, we expect production levels at Christina Lake and Foster Creek to increase from 258,000 barrels per day (bbl/d) (gross) currently to 600,000 bbl/d (gross) by 2020 and to drive significant free cash flow growth. Recent performance at Foster Creek has not been as good as we have seen historically, and expectations have been tempered somewhat for 2014. However, we remain confident in management’s ability to right the course at Foster Creek.

Beyond Christina Lake and Foster Creek, Cenovus is looking to build on its SAGD success with the Narrows Lake, Telephone Lake and Grand Rapids projects, which are also located in Alberta. Narrows Lake is expected to make use of solvent-assisted SAGD (referred to as SAP or solvent-assisted process). Compared with barebones SAGD, SAP-SAGD is expected to decrease the SOR of the project by 30% while increasing full field recovery by up to 15%. This, in turn, is expected to drive sustaining capital costs down by 10% while lowering water usage, emissions and land footprint. The 45,000 bbl/d Narrows Lake SAP-SAGD project is currently under construction and is expected to be onstream in 2017.

Regulatory approval for the Telephone Lake project is expected in the first quarter of 2014 for 90,000 bbl/d, which is split between two phases. Cenovus is also seeking regulatory approval for its Grand Rapids SAGD project by the end of the year, which could bring an initial 60,000 bbl/d (of an eventual 180,000 bbl/d) onstream by 2017. A pilot project at Grand Rapids has been operating since December 2010.

Complementing Cenovus’ oil sands assets are its interest in two refineries. Through a joint venture agreement with Phillips 66, Cenovus holds a 50% non-operated working interest in the Wood River (Illinois) and Borger (Texas) refineries. With a combined gross capacity of 457,000 bbl/d (with dedicated heavy oil conversion capacity of ~235,000 bbl/d), the refineries provide vertical integration with the oil sands assets to help offset the impact of widening heavy oil differentials.

In addition, the company has a portfolio of conventional assets in Western Canada, which includes oil and natural gas opportunities. Given the recent strength in gas pricing, the company’s ~500 million cubic feet per day of natural gas production should provide strong cash flow in 2014.

Cenovus is our preferred name in the vertically integrated Canadian energy space based on its industry-leading operational efficiencies and growing free cash flow profile. The stock has seen a material decline in the past year, creating a compelling opportunity to enter a premium name. Our $39.00 target is based on our 2014 net asset value (NAV) per share estimate and a 7.5x multiple on our 2015 cash flow per share (CFPS) estimate.

• SNC recently completed the build-out of its senior leadership team—new additions should support the company’s plans to be among the pre-eminent engineering & construction companies in the resource sector.

SNC is one of the leading engineering & construction groups in the world, with five core project categories—Infrastructure & Environment, Power, Oil & Gas, Mining & Metallurgy and Other Industries, in addition to its Operations & Maintenance and Infrastructure Concession Investments (ICI) divisions.

SNC continues to make gradual progress toward closing a difficult chapter marred by past ethical issues. Most recently, it received the ‘green light’ from the AMF to bid on public contracts in its home province. We believe this authorization is a key milestone for SNC in terms of re-establishing its credibility with domestic and international clients, although work remains to be done.

In our view, one of SNC’s most promising characteristics is the calibre of senior management assembled by CEO Robert Card. New additions to the senior leadership team consist largely of highly regarded executives with track records at blue-chip multinationals, including some of SNC’s competitors and clients. From a strategic perspective, we expect them to focus chiefly on growing and consolidating SNC’s capabilities in the resource sector, especially oil & gas.

In our view, SNC will likely supplement organic growth with growth by acquisition. However, management has indicated that it hopes to leave outstanding legal and ethical issues behind it before becoming more aggressive on the mergers and acquisitions front. Nonetheless, ongoing efforts to monetize a portion (or all) of AltaLink should ultimately result in greater financial flexibility for SNC to expand its core engineering capabilities. Other catalysts include the potential award of contracts in SNC’s bid pipeline over the next
3–12 months, including P3 projects with estimated capital costs of ~$10b. Over the longer term, SNC is poised to benefit from a multi-billion-dollar opportunity in the Ontario nuclear power space and, potentially, from new-build in Romania and the UK.

The main risks to our investment thesis are (1) further cost provisions on non-performing contracts worth $1b to be completed in 2014–15 (vs total backlog of $9b), (2) failure to settle outstanding or potential legal issues, or the incurring of higher-than-expected penalties ($200–400m would be within the range of expectations), and (3) further deterioration in the global mining business. On balance, we believe investors are increasingly comfortable with these risks and that the shares should move higher as strategic initiatives are successfully completed.

Our target price of $55/share is derived from the combination of (1) SNC’s core engineering & construction business, which we value at $25/share by applying a 16x multiple to our 2015 EPS estimate, and (2) its Infrastructure Concession Investments (ICI) portfolio, which we value at $30/share, including AltaLink ($14/share) and Highway 407 ($10/share), among others.