Cenovus Drops Most Ever as $13.3 Billion Deal Ramps Up Risks
(Bloomberg) - Cenovus Energy Inc. fell the most since its trading debut more than seven years ago after agreeing to buy Canadian oil assets from ConocoPhillips for C$17.7 billion ($13.3 billion) in a deal that increases its risks at a time of uncertain oil prices.
Cenovus is paying Conoco C$14.1 billion in cash and 208 million shares for its 50 percent stake in their Foster Creek and Christina Lake oil-sands venture, plus most of its conventional assets in the Deep Basin of Alberta and British Columbia. The deal is the latest sale of energy assets in Canada by international companies gravitating toward higher-profit drilling in U.S. shale basins.
While the acquisition will double the Calgary-based producer’s reserves and production, it ties it heavily to one of the costliest methods of producing oil after prices sank below $30 a barrel just last year. The deal also weakens its balance sheet, with Cenovus funding the cash portion of the deal by tapping its credit line, taking on a C$10.5 billion bridge loan and selling C$3 billion of shares at a discount to recent prices.
“Cenovus’ risk profile has drastically changed with this deal,” Chris Cox, an analyst at Raymond James in Toronto, said in an interview. “The company had one of the strongest balance sheets in its peer group, to now unequivocally having the highest-risk profile of the Canadian large caps.”
Cenovus limited its upside on the acquisition by agreeing to make contingent payments to Conoco over the next five years if Western Canadian Select prices rise above C$52 a barrel. Also weighing on Cenovus shares was Conoco’s statement that it plans to start liquidating its holdings in the stock after a six-month lockup period.
Shares Tumble
Cenovus shares slid as much as 13 percent to C$15.24 in Toronto, the biggest intraday decline since it was spun off from Encana Corp. in November 2009. The shares already were down 14 percent this year through yesterday. Meanwhile, Houston-based Conoco had its best day in four months, rising as much as 9.7 percent to $50.41 in New York.
The sale comes two weeks after Canadian Natural Resources Ltd. agreed to spend C$12.7 billion to buy assets in Alberta from Royal Dutch Shell Plc and Marathon Oil Corp. It follows by a month Conoco’s announcement that its reserves fell to a 15-year low after removing oil-sands barrels that were uneconomic as crude prices sat below $50 a barrel.
The new assets allow Cenovus “to take full control of our best-in-class oil sands projects and to add a second growth platform across the prolific Deep Basin that provides complementary short-cycle development opportunities,” said Brian Ferguson, Cenovus chief executive officer.
Largest Shareholder
Combined, the holdings in the agreement can produce 298,000 barrels of oil equivalent a day in 2017. The transaction, expected to close in the second quarter, will make Conoco into Cenovus’s largest shareholder, with about a 25 percent stake.
With about 440,000 barrels a day of capacity after the acquisitions, Cenovus will be the third-largest oil-sands producer by the end of the decade, behind Suncor Energy Inc. and Canadian Natural, according to company statements.
In a separate statement, Conoco said it would use the proceeds to reduce debt to $20 billion in 2017, and to double a share repurchase program to $6 billion. The company plans to triple its buybacks this year to $3 billion, with the remaining $3 billion spent in the next two years.
“We were just looking for the maximum value that we could get for the assets, and that happened to come from a combination of cash and equity and the contingent payment," Chief Financial Officer Don Wallette Jr. told analysts on a conference call Wednesday.
Conoco doesn’t plan to remain a shareholder in Cenovus for the long-term and will sell its position “over time and do it in an orderly way,” he said.
Maximum Value
The transaction will be Cenovus’s biggest since it was separated from Encana Corp. in 2009. In that split, Encana retained most of the previous company’s natural gas assets, while Cenovus held the oil assets. The current deal is the largest in the Canadian oil patch since CNOOC Corp. bought Nexen Energy for $17 billion in 2012.
12
View Full Article
WHAT DO YOU THINK?
Generated by readers, the comments included herein do not reflect the views and opinions of Rigzone. All comments are subject to editorial review. Off-topic, inappropriate or insulting comments will be removed.
- Gunvor CEO Sees Russian Refining Capacity Taking Hit from Drone Strikes
- These Factors Helped Brent Oil Price Break Above $85
- Sinopec Engineering Posts Higher Annual Petrochemicals Revenue
- Imperial Pipeline in Winnipeg Goes Offline for Three Months
- Gaz System to Acquire Gas Storage Poland
- Subsea7 Secures Contract to Service Woodside's Trion
- Adnoc Inks Supply Deal for Ruwais LNG Project with Germany's SEFE
- EIA Boosts USA Crude Oil Production Forecasts
- Norway Regulator Blasts Proposal to Halt New Oil and Gas Permits
- Chinese Mega Company Makes Major Oilfield Discovery
- EIA Drops 2024 Henry Hub Gas Price Forecast
- EIA and Standard Chartered Offer Up Latest Oil Price Predictions
- Red Sea Region Sees Another Watershed Incident
- Chevron Oil Project in Kazakhstan to Cost $48.5B
- OPEC Voices Encouragement after IEA Affirms Support for Oil Security
- Biden Govt Bares Strategy for Freight Charging, Hydrogen Fueling Infra
- Rystad Looks at the Buzz Around White Hydrogen
- Ukraine Hits Third Russian Refinery In Escalating Drone Strikes
- VIDEO: Missile Attack Kills Crew Transiting Gulf of Aden
- Norway Regulator Blasts Proposal to Halt New Oil and Gas Permits
- Chinese Mega Company Makes Major Oilfield Discovery
- What Is the Biggest Risk to Offshore Oil and Gas Personnel in 2024?
- Is Peak Oil Demand Close?
- Vessel Sinks in Red Sea After Missile Strike
- JP Morgan, Standard Chartered Reveal Latest Oil Price Forecasts
- Exxon Rights in Stabroek Do Not Apply to Hess Merger with Chevron: Hess
- Rystad Forecasts Net Production of Top Permian Producers in 2024
- Analysts Reveal Latest Oil Price Outlook Following OPEC+ Cut Extension