Cenovus CEO steps down as firm tries to justify $17.7B Conoco acquisition
Cenovus Energy Inc. CEO Brian Ferguson had promised to transform the company when he announced a $17.7-billion acquisition of ConocoPhillips’ Canadian assets in March.
But three months later he is stepping down as the company struggles to justify the massive acquisition that has ballooned its debt and chopped its market value nearly in half.
Cenovus announced Tuesday that Ferguson would step down from his position as CEO in October. Cenovus shares fell to an all-time low Tuesday, and closed at around $9.49 — down seven per cent on the day, oil prices also hit a nine-month low. Its shares were trading around $17 before the deal was announced, marking a steep decline that has wiped away billions of dollars in market value.
“This is a trying time for our shareholders,” Ferguson said Tuesday during the company’s investor day in Toronto.
Market observers were quick to criticize Ferguson for not sufficiently addressing investor concerns over Cenovus’ debt levels, or how the company plans to receive fair value for its planned sale of assets.
“The elephant in the room here, to me, is that they did not address the last 2.5 months of carnage that the market has had to deal with,” said Rafi Tahmazian, a senior portfolio manager at Canoe Financial based in Calgary. The fund manager said he had sold his position in Cenovus years ago.
Cenovus’ debt now sits at $12.7 billion, or four times earnings before interest, tax, depreciation and amortization (EBITDA), assuming WTI prices at US$54. The company’s market capitalization as of Tuesday stood at roughly $11.15 billion.
“I want to know what they’re going to do to fix the problem,” Tahmazian said.
Ferguson declined to address whether the decision to step down coincided with the ConocoPhillips acquisition. The company has not yet named a successor.
“Retirement is a personal decision,” Ferguson said.
The company released a fiveyear strategic plan Tuesday in response to its dwindling share price, including plans to sell between $4 billion and $5 billion in assets by year-end. The divestitures include planned sales of its Pelican Lake oil property, about 300 kilometres north of Edmonton, and Suffield natural gas development, in southeastern Alberta. The strategy includes raising its production at six per cent compound annual growth rate, assuming West Texas Intermediate (WTI) prices of US$55.
Ferguson had led Cenovus since its inception since 2009, when it was spun out of Encana Corp. to focus on the oil assets. Cenovus
The elephant in the room ... is that they did not address the last 2.5 months of carnage that the market has had to deal with.
became an oilsands-focused company that held some of lowest-cost assets in the northern Alberta region, including its steam-driven Christina Lake and Foster Creek developments.
The ConocoPhillips deal, which included bitumen assets in northern Alberta as well as a range of natural gas and conventional assets spread throughout Western Canada, was seen as a sharp divergence from the company’s core operations.
Cenovus had major growth ambitions under Ferguson, but was forced to stall some of its expansion plans following an oil rout that began in mid-2014 that forced the company to cut its head count by 1,500. It also built the massive Brookfield Place tower in downtown Calgary to house its growing ambitions, though the building is expected to remain largely vacant after its scheduled opening this summer.
“Most large mergers are the result of ego-driven CEOs who want to build empires, and usually they do it near the top of the market,” said Norman Levine, a managing director at Toronto-based Portfolio Management Corp., which does not have a position in Cenovus.
Now, the company is increasingly exposed to prices at a time when the oil markets have turned bearish. Most analysts peg Cenovus’s break-even costs, following the acquisition, at around the US$50 or higher range.
The company has hedged higher volumes of its oil to counter the impacts of falling oil prices. It has hedges in place for 143,000 barrels per day for the remainder of 2017 at an average price of US$51.50, according to analysts at RBC Capital Markets, with another 50,000 bpd of crude hedged in the first half of 2018 at just under US$50.