Cenovus’ $3.3B sale has it ready for M&A
• Cenovus Energy Inc.’ s $3.3-billion sale of its royalty lands sets the company up with a massive war chest it could use for future acquisitions, analysts say.
The oilsands producer confirmed weeks of rumours in announcing Tuesday it has struck a deal to sell 4.8 million acres of royalty lands in Alberta, Saskatchewan and Manitoba to the Ontario Teachers’ Pension Plan.
Once the Teachers deal closes in late July, Cenovus will have $5.1-billion worth of cash on hand — including $1.5 billion from a February equity raise. The company wouldn’t specify what it would do with the funds.
“The proceeds from this sale will strengthen our balance sheet and provide us with greater resilience during these uncertain times as well as the flexibility to invest in organic projects with strong returns,” Cenovus chief executive Brian Ferguson said in a release.
Company spokesman Reg Curren said the disposition gives the company the option to pursue potential opportunities, but added, “further details on the use of the proceeds will be disclosed at a later date.”
FirstEnergy Capital Corp. analyst Michael Dunn said in a research note that the “transaction gives Cenovus the balance sheet flexibility with several options for its use of proceeds, including accelerating its capital program and pursuing potential acquisitions.”
The value of the transaction was larger than expected, in part because Cenovus packaged interests in additional assets into the deal.
Observers expected the deal to include “fee-simple” properties where Cenovus, rather than the province, owned the rights to all the minerals on the land. But Tuesday’s announcement showed the company is also selling royalty interests in its Pelican Lake oilsands project and its conventional oil project in Weyburn, Sask.
These latter assets are described as “gross overriding royalties,” and will entitle Teachers to production from Pelican Lake and Weyburn.
Once the deal with Teachers closes, 7,800 barrels of oil equivalent per day will disappear from Cenovus’s production volumes.
Despite the company’s improved cash position, described as a “$5-billion cash war chest,” National Bank Financial analyst Kyle Preston expects Cenovus to play it safe and use the money to handle debt maturities and potentially speed up some of its own growth projects.
He added that the $3.3-billion value of the deal is likely more than Canadian Natural Resources Ltd. will pull in, when and if that company sells its own royalty land package. “You really have to distinguish between the types of assets the companies have,” Preston said of Cenvous and CNRL.
Executives at Cenovus and CNRL have spoken publicly about selling or spinning out royalty land packages for the past year, ever since Encana Corp. raised $4.2 billion when it spun out PrairieSky Royalty Ltd. in an initial and secondary offering.