Mar­ket not sold on Cen­ovus

National Post (National Edition) - - FINANCIAL POST - JONATHAN RAT­NER

Cen­ovus En­ergy Inc. thinks big­ger is bet­ter. The mar­ket isn't so sure. In­vestors drove shares in the Cal­gar­y­based en­ergy pro­ducer down more than 13 per cent on Thurs­day, af­ter the com­pany an­nounced a block­buster $17.7-bil­lion deal to buy as­sets from Cono­coPhillips late on Wed­nes­day.

The ac­qui­si­tion dou­bles Cen­ovus' cur­rent pro­duc­tion and re­serves, mak­ing it the coun­try's third-largest oil and gas pro­ducer by vol­ume.

Make no mis­take: the trans­ac­tion is a bet on higher oil prices, and it un­sur­pris­ingly comes with more debt.

Not in­clud­ing Cen­ovus' planned as­set sales, the deal will bring the com­pany's net debt up to ap­prox­i­mately $13.5 bil­lion, or roughly 2.5x to 3.0x net-debt to EBITDA for 2018, up from about 1.0x pre­vi­ously.

“No­tably, Cen­ovus goes from ex­hibit­ing one of the strong­est bal­ance sheets in the peer group, to one of the most lev­ered,” Ray­mond James an­a­lyst Chris Cox told clients.

Those types of num­bers are hard for the mar­ket to ig­nore, as is the bought deal fi­nanc­ing that will see Cen­ovus raise more than $3 bil­lion as it sells as much as 215 mil­lion shares at $16 each.

That $16 price tag isn't look­ing like much of a deal af­ter Thurs­day, when the stock ended down $2.40, or 13.75 per cent, to $15.05 on the Toronto Stock Ex­change.

If Cen­ovus wants to mean­ing­ful re­duce its debt and lever­age, Mac­quarie Cap­i­tal Mar­kets an­a­lyst Brian Bag­nell be­lieves WTI oil prices will need to be well above US$50 per bar­rel on a sus­tained ba­sis.

As­set sales will help the com­pany re­duce its ab­so­lute debt, but they prob­a­bly won't have much im­pact on lever­age. As Bag­nell noted, Cen­ovus' WTI free cash flow breakeven will be close to US$50 per bar­rel in 2017 if its planned as­set sales oc­cur.

Canac­cord Ge­nu­ity an­a­lyst Den­nis Fong es­ti­mates that the com­pany could see cash flow per share de­cline by five per cent for each US$1 per bar­rel dip in WTI oil prices.

The oil­sands as­sets in­volved demon­strated higher sen­si­tiv­ity to crude pric­ing dur­ing the down­turn, and while it is un­likely we'll see a re­peat of the 2016 lows, they're still fresh in the minds of in­vestors.

And if oil prices do stage a more durable re­cov­ery from here, Cen­ovus will lose some­where around 15 to 20 per cent of the up­side as a re­sult of con­tin­gency pay­ments promised to Cono­coPhillips.

Such lim­i­ta­tions on the up­side ben­e­fit of oil price strength may not sit well with en­ergy in­vestors.

That's not to say the deal doesn't have its mer­its. For ex­am­ple, in­te­grat­ing the bulk of the as­sets — Conoco's 50 per cent work­ing in­ter­est in the Foster Creek and Christina Lake oil sands projects — can es­sen­tially be done im­me­di­ately.

These are also con­sid­ered best-in-class projects that pro­vide rel­a­tively low-risk growth.

But since the ad­di­tional ex­po­sure from these vol­umes were not off­set by in­creased down­stream re­fin­ing as­sets, Cen­ovus ap­pears much more ex­posed to heavy oil pric­ing.

The com­pany is also adding con­ven­tional gas as­sets in the Al­berta and B.C. Deep Basin, which may be con­fus­ing to some as it marks a di­ver­si­fi­ca­tion away from the oil­sands.

How­ever, there is a strate­gic ben­e­fit in buy­ing an as­set that can pro­duce neart­erm growth and pro­vide a source for nat­u­ral gas liq­uids.

Cox also pointed out that Cen­ovus' le­gacy oil­sands pro­duc­tion was al­ready out­pac­ing the its net share of heavy oil pro­cess­ing ca­pac­ity in the down­stream op­er­a­tions.

As a re­sult, the com­pany will now be fully ex­posed to swings in heavy oil dif­fer­en­tials for ef­fec­tively all of the oil sands pro­duc­tion be­ing ac­quired.

While Cen­ovus sunk, Cono­coPhillips ral­lied sharply, per­haps be­cause some of the pro­ceeds from the deal will go to­ward its share buyback pro­gram and im­prov­ing its bal­ance sheet.

It's rare to see an oil com­pany re­pur­chase stock when cycli­cal fac­tors are mov­ing in favour of oil prices.

That's cer­tainly not the route Cen­ovus has cho­sen to take, as it opts to de­ploy cap­i­tal for an ac­qui­si­tion as op­posed to buy­backs, de­spite what in­vestors may have been hop­ing for.

Newspapers in English

Newspapers from Canada

© PressReader. All rights reserved.