Cenovus upbeat after Conoco deal
CEO heralds ‘strong financial position’ despite negative reaction to acquisition
Cenovus Energy Inc. chief executive Brian Ferguson says the company is encouraged by interest in its plan to divest assets to fund part of its $17.7-billion deal to buy ConocoPhillips’ Canadian holdings, which should improve investor sentiment around the acquisition.
The Calgary-based CEO, who has seen his company’s market capitalization drop by 15 per cent since the deal was announced, said asset divestiture was “by far the most frequently asked question” by investors as they scrutinize the complex transaction.
“We’ve had multiple inbound inquiries from various source, private equity funds, pension plans, smaller companies, letting us know that they’re interested in the assets,” Ferguson said during a media briefing at a conference organized by the Canadian Association of Petroleum Producers in Toronto.
In late March, Cenovus said it would buy out partner ConocoPhillips’ 50 per cent stake in jointly controlled oilsands assets in addition to acquiring Conoco’s Deep Basin assets in Alberta and British Columbia.
When completed in the second quarter, the deal will raise Cenovus’ production by just under 300,000 barrels of oil equivalent per day, to 588,000 boepd.
But the assets come at a significant price and increase the company’s indebtedness at a particularly troubled time for the industry.
Cenovus will pay the high price tag by various means, including whittling down its $3.7-billion cash war chest to $1 billion; raising $3.3 billion in a bought deal; issuing $3.9 billion in credit notes; and targeting $3.6 billion from asset divestments.
Conoco will also receive a $3.6-billion equity stake in Cenovus.
“The recurring question we are getting is the plan to deleverage the balance sheet,” Ferguson said.
The company has already secured 75 per cent of its financing requirements, and with a $3-billion credit facility on tap and investment grades by ratings agencies, the company remains on sound financial footing, Ferguson said.
“Even in a lower price world, we will remain in a strong financial position, as … we have two strong growth platforms generating free cash flow at US$50 WTI — that makes us more financially resilient,” Ferguson said. “This transaction doubles our cash flow. We are not doubling our capital.”
However, DBRS Limited has placed the company “under review with negative implications,” citing the company ’s high indebtedness.
Another concern among investors is that Cenovus may have overpaid for the assets in an uncertain oil price environment.
Bob Brackett, an analyst at Sanford Bernstein, estimates the embedded oil price of the deal was around US$70 per barrel, compared to its current price of US$53.26.
“I have heard that (Cenovus overpaid) occasionally over the past few days,” Ferguson admitted. “I strongly believe we paid a fair price for a top decile assets and ones that have significant growth forward.”
Ferguson hopes to orchestrate a new design for the company that can remain solvent at US$50 oil prices, focused on two planks — the oilsands and the Deep Basin — with at least two decades of growth left in each.
“I don’t need to rely on (oil) price increase to increase earnings and cash flow,” Ferguson said. “That is part of what I find really exciting about the transaction.”
Analyst reaction remains muted for now.
“Market reception to Cenovus’ COP acquisition was decidedly swift and negative — in large part due to the purchase price and financial leverage implications,” Greg Pardy, an analyst with RBC Capital Markets, wrote in a note to clients last week.
The bank has maintained its outperform recommendation on Cenovus Energy but trimmed its one-year target price by $2 (or eight per cent) to $23 per share, Pardy said.
Cenovus’ stock was down two per cent on the Toronto Stock Exchange on Tuesday to close at $14.71.