Cenovus lands Conoco assets in $17.7 billion deal
Megadeal transforms pure-play firm into natural gas player for the first time
CALGARY Cenovus Energy Inc. is paying $17.7 billion to buy assets from ConocoPhillips in a blockbuster deal that both deepens the concentration of Canadian ownership in the oilsands and turns the previously pure-play Cenovus into a significant natural gas producer.
Cenovus said Wednesday that it is acquiring ConocoPhillips’s 50 per cent stake in oilsands assets the two companies previously coowned as well as ConocoPhillips’ conventional oil and natural gas assets in west-central Alberta and northeastern B.C.’s Deep Basin.
Brian Ferguson, president and CEO of Cenovus, called the deal “a unique opportunity to take full control of our oilsands assets,” and added it would double his company’s total production and reserves.
The deal will turn Cenovus into the third-largest oilsands producer, behind only Canadian Natural Resources Ltd. and Suncor Energy Inc., and is being funded with 208 million Cenovus shares, cash and bridge loans. The company also announced it would raise $3 billion in a bought deal by selling 187.5 million shares.
“Given that we already fully operate the (joint-venture) assets, we are effectively doubling our oilsands exposure with no integration risk,” Ferguson said. “We also view this transaction as a strategic opportunity to establish an expansive presence in the Deep Basin.”
Following the announcement, credit ratings agency DBRS Ltd. announced it would place Cenovus’ credit under review with negative implications because it would take on enough debt to “pressure” the firm’s current credit rating.
“Depending on proceeds raised from asset sales (which are targeted for debt reduction), a rating downgrade is likely,” DBRS analysts wrote.
Ferguson said Cenovus planned to sell off its Pelican Lake oilsands properties and some light oil assets in southeastern Alberta as a result of the deal, and it would revisit its dividend once those assets sold.
Before DBRS released its note, Ferguson said he was confident the company could preserve its credit ratings following the “transformative” acquisition, which he expects will close in the second quarter.
“This is a natural consolidation,” Wood Mackenzie analyst Peter Agiris said, noting Cenovus’ long partnership with ConocoPhillips.
Canadian Natural Resources Ltd.’s $12.7-billion purchase of Shell’s oilsands assets this month and Athabasca Oil Corp.’s $832 million purchase of Statoil S.A.’s thermal facilities are other examples of Calgary-based companies consolidating in the oilsands.
He also said that while the deal does continue the trend of Canadian ownership, ConocoPhillips isn’t exiting the heavy oil play as it will own roughly 20 per cent of Cenovus after the deal closes and retains a stake in the Surmont oilsands project with Total S.A.
The deal also transforms Cenovus into a natural gas player for the first time.
Cenovus was spun out of Encana Corp. to focus on oil in 2009 but will now become a significant natural gas player in west-central Alberta and northeastern B.C. gas fields. The company plans to spend $170 million in the Deep Basin gas formation this year, ramping up significantly in 2018 and beyond, Ferguson said.
“There’s some allure to being a pure play,” Agiris said of Cenovus, but added the ConocoPhillips deal would help diversify the company’s revenues and commodity exposure.
Ferguson said Cenovus is also acquiring 1.4 billion cubic feet per day of gas processing capacity that has largely been under-utilized. He said it plans to increase gas production in the coming years.