Cenovus-Canexus terminal deal lauded
Both investors, analysts approve of terminal sale
Shares in both Cenovus Energy Inc. and Canexus Corp. rose Friday as analysts praised the former for buying the latter’s crude-by-rail trans-loading facility for a bargain $75 million — and investors in the latter rejoiced at being free of a non-profitable asset that had been built at a higher than expected cost.
Calgary-based Canexus stock rose in early trading by 18 per cent or 26 cents to $1.70 on heavy volume and closed at $1.62, up 12.5 per cent. It had hit a 52-week low of $1.36 on Monday; its 52-week high came last August at $5.49.
Cenovus, also headquartered in Calgary, closed 16 cents higher at $20.41.
In a report to investors Friday morning, analyst Steve Hansen of Raymond James said he was lowering his 12-month target price for Canexus to $1.80 from $2 to reflect the deal announced Thursday after markets closed. He had been estimating the sale of the company’s North American Terminal Operations or NATO would bring in $125 million.
“Notwithstanding the sour macro (oil price) backdrop … and Canexus’ position of weakness (distressed balance sheet), we regard NATO’s $75-million price tag as surprisingly low given the underlying land value, and about $375 million invested into the terminal’s construction,” he wrote.
“That being said, the terminal sale does remove a persistent cash burn and will undoubtedly allow management to refocus its efforts on the company’s core chemical business.”
He said the company’s ongoing debt problems — it reported total borrowings of $356 million as of March 31 — suggest it will have to sell off its North Vancouver chlor-alkali plant, which he estimated could fetch $180 million to $200 million. The facility was listed for sale in January.
Analyst Robert Hope of Macquarie Securities said he had been estimating NATO’s value at $50 million, well below book value of $318 million, because of a big writedown earlier this year.
“Without a doubt NATO has been a disappointing endeavour for the company given the significant cost overruns, operational difficulties, and inability to fully contract the facility,” he wrote in a report.
Cenovus spokeswoman Rhona DelFrari said Friday the company moved about 13,000 barrels of oil per day by rail in the first quarter, with most of it going through the Canexus terminal at Bruderheim, about 50 kilometres northeast of Edmonton. Cenovus’s total oil output was 218,000 bpd.
“It’s an up and down when it comes to how much oil we’re going to transport by rail versus pipeline and it depends on the pipeline congestion situation,” she said. “Over the long term we expect we will have about 20 per cent of our transportation by rail.”
She said it costs $7 to $10 per barrel to ship oil by pipeline and $15 to $18 by rail — but choice of destination is much greater with rail. She said it’s not known yet whether owning the terminal will have a material benefit on shipping costs.
Analysts who cover Cenovus pointed out that low price differentials between New York-traded West Texas Intermediate and western Canadian heavy oil make rail transport less economically attractive for producers than in the past. But they praised the deal because it gives Cenovus preferential access to a loading facility for a price that’s much lower than its cost to build.
“Overall, we view this as a logical but relatively immaterial transaction for Cenovus, as it falls in line with their long-term strategy of shipping 10 to 20 per cent of corporate volumes by rail,” said analyst Kyle Preston of National Bank Financial, in a note.
The facility has capacity of 100,000 barrels per day, with 30,000 bpd of truck-to-rail capacity.