CENOVUS CEO FACES SHAREHOLDERS’ WRATH
Ferguson defends decision to take on debt to position company for blockbuster deal
Chief executives get paid big bucks to make difficult decisions, but also to take the flack if things go poorly.
Cenovus Energy chief executive Brian Ferguson faced such a moment head-on at the company’s annual meeting Wednesday.
It came as investors are unhappy with the Calgary-based producer’s poor stock performance following its $17.7-billion acquisition of ConocoPhillips’ assets in Western Canada.
The blockbuster deal doubles the company’s production, gives Cenovus full ownership of existing co-owned oilsands properties and provides it with a new platform in the Deep Basin region of British Columbia and west-central Alberta.
However, the share price is down 22 per cent since the announcement, closing at $13.55 Thursday on the Toronto Stock Exchange.
At the annual meeting, Ferguson devoted much of his speech to addressing the criticism that Cenovus paid too much and is taking on too much debt.
“I’ve heard those concerns and I understand the concerns,” he told reporters after the meeting.
“It’s a large transaction, I understand that. It’s a bold transaction. I strongly believe it’s the right transaction for Cenovus and that it’s been structured in the right way.”
There’s no doubt the acquisition is transformative.
Cenovus will pick up about 298,000 barrels of oil equivalent per day of production from ConocoPhillips and become the country’s biggest thermal oilsands producer.
To help pay for it, the company will take on debt, as well as issue 208 million common shares to ConocoPhillips, and it also unveiled a $3-billion bought-deal for 198.5 million shares.
In addition, the company is looking to sell off at least $3.6 billion in assets, including its Suffield and Pelican Lake properties.
But the senior producer faces concerns about the implications for its balance sheet.
A report by Peters & Co. earlier this month said it expects Cenovus to end this year with $8.5 billion of net debt, instead of $1.7 billion without the transaction.
It also deemed the deal’s value “is approximately $4 billion-$5 billion too high considering the implied value of the oilsands assets in its previous stock price.”
At the meeting, a small retail investor voiced similar concerns.
“I don’t particularly like the way this was structured here with a huge amount of debt that’s piled onto the balance sheet,” said the investor, who said he owns 1,500 shares.
Len Racioppo, managing director of Coerente Capital Management Inc., which controls more than 500,000 Cenovus shares, is upset investors weren’t given a final say on the deal, given it will dilute existing shareholders.
As the Financial Post’s Geoffrey Morgan reported this week, Racioppo has written to regulators asking them to stop the transaction due to its size, and to require a shareholder vote, although he doubts that will occur.
Racioppo also thinks the company paid too much and has moved into a new region in the Deep Basin that will require a lot of capital during a period of uncertain commodity prices.
“I’m very frustrated and I know other shareholders are,” he said in an interview.
“They’ve really leveraged the balance sheet and gone into an area of the business they don’t know, and that’s what is very, very concerning. And to do all that, they’ve diluted us in a significant fashion.”
At the meeting, Cenovus Energy’s outgoing chairman, Michael Grandin, pointed out the company wasn’t required by securities laws to hold a shareholders’ vote and described the acquisition as a “once-in-a-lifetime opportunity.”
The deal takes place against the backdrop of the oilsands sector going through a period of intense cost-cutting and consolidation, with several international producers packing up and leaving the country.
In his speech to shareholders, Ferguson noted the company has reduced per-barrel operating costs in the oilsands by 30 per cent since 2014, but stressed cost-efficiencies alone aren’t enough to create value in a world of lower oil prices.
Instead, economies of scale are essential.
“We also understand that we will be, and are, in show-me mode before the market is going to give us credit for this,” he said of the acquisition.
Industry analyst Fai Lee of Odlum Brown said it’s clear the market has concerns about the deal, although he thinks investors have lost sight of the bigger picture.
“People are focusing on the wrong issue: the real issue is do you believe oil prices are going to go higher ... and how much value is that going to add,” he said.
The CEO called $17.7 billion “a fair price for top-tier assets” and noted shareholders voted 87 per cent in favour of the board of directors at the meeting.
As for the motivation to make a game-changing acquisition, Ferguson said it’s important to understand the deal will generate more free cash flow and set the table for future growth.
“This is something that I absolutely wanted to do, didn’t need to do it, so we looked at other alternatives. Do we just buy back (stock), take $2.7 billion in cash and buy back shares?” he said.
“Having $3 billion or $4 billion in cash on my balance sheet, that isn’t financial resilience. Yes, that gets me through a rainy day, but what really creates financial resilience and sustainability is the cash-generation capacity of the core business that you’ve got.”
And so Ferguson continues to explain the merits of the Canadian oilpatch’s biggest deal of the year.
But judging from the share price, it’s clear the jury is still out and the CEO has more work to do to stop the flack from flying.
I don’t particularly like the way this was structured here with a huge amount of debt that’s piled onto the balance sheet.