Cenovus Energy Inc. will double its reserves and production by buying Canadian holdings from ConocoPhillips for C$17.7 billion ($13.3 billion), the latest sale of energy assets in that country by international companies stung by falling oil prices.
The deal includes Conoco’s 50 percent interest in a joint venture with Cenovus in Canada’s oil sands, the Calgary-based company said in a statement Wednesday. Cenovus also gets most of Conoco’s Deep Basin conventional assets in Alberta and British Columbia. Combined, the holdings are forecast to produce 298,000 barrels of oil equivalent a day in 2017.
The sale comes two weeks after Canadian Natural Resources Ltd. agreed to spend C$12.7 billion to buy Alberta fields and processing centers 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.
“This is an easy fit,” said Michael Kay, an analyst at Bloomberg Intelligence in New York. “ConocoPhillips is focused elsewhere, and Cenovus has made it a priority to expand in the oil sands. It’s mostly a domestic industry now.”
The transaction is expected to close in the second quarter. It will be financed with C$14.1 billion in cash and 208 million Cenovus shares, according to the statement. That will make Conoco into Cenovus’s largest shareholder, with about a 25 percent stake.
Full Control
The deal allows 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.
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.
Along with announcing the sale, Cenovus said it will sell 187.5 million shares at C$16 each, a price 8.3 percent below the closing price Wednesday, to raise about C$3 billion. Cenovus has a C$10.5 billion bridge loan in place with Royal Bank of Canada and JPMorgan Chase & Co., the company said in the statement. Cenovus will also make contingency payments to Houston-based Conoco over five years, if oil prices rise above C$52 a barrel.
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. Conoco’s shares rose 6.2 percent to $48.80 at 5:18 p.m., after the official close of trading in New York.
Liquidating Shares
Conoco doesn’t plan to remain a shareholder in Cenovus for the long-term, Chief Financial Officer Don Wallette Jr. told analysts on a conference call Wednesday. After a six month pause mandated by the deal, “we will liquidate our position over time and do it in an orderly way.”
“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,” he said.
The transaction will be Cenovus’s biggest since it was separated from Encana Corp. in 2008. 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 US$17 billion in 2012.
Transport Issues
The industry has long been hampered by a lack of adequate transport options to move its crude to market. A series of proposed pipelines — and renewed support in the U.S. for the Keystone XL project — may help to ease a bottleneck that has kept Western Canadian oil prices below global benchmarks.
Canadian Natural, Cenovus and MEG Energy Corp. have announced expansion projects in the past five months that will add a total of 110,000 barrels a day of capacity when completed in 2019.