Cenovus buys Husky in $3.8-billion mega deal
CENOVUS TO BUY HUSKY, TURNING IT INTO COUNTRY'S 2ND-LARGEST REFINER
Cenovus Energy Inc. will become one of Canada’s largest refining companies after announcing a blockbuster oilpatch deal Sunday to buy Husky Energy Inc. for $3.8 billion, plus assume Husky’s $5.2 billion in long-term debt, as consolidation continues in the country’s beleaguered oil and gas industry.
The all-share deal came a surprise to many analysts and investors but Cenovus president and CEO Alex Pourbaix said in an interview with the Financial Post that “tires have been kicked” on a combination between the two Calgary-based oil majors “over the years, off and on.”
The merger between Cenovus and Husky is the largest deal so far this year between two Canadian oil and gas producers. When the value of both companies’ equity and debt is counted, the merger is worth $23.6 billion.
“The discussion kind of started again in earnest once the pandemic started,” Pourbaix said of negotiations between Cenovus and Husky, which together will produce 750,000 barrels of oil equivalent per day, making it the third largest oil and gas producer in Canada behind Canadian Natural Resources Ltd. and Suncor Energy Inc.
The deal also turns Cenovus into the country’s second largest upgrading and refining operation after Suncor. After the deal closes, Cenovus will own 660,000 bpd of oil processing capacity thanks to the addition of Husky’s four refineries in Alberta, Wisconsin and Ohio to its existing ownership stake in two refineries, which are in Illinois and Texas.
The deal between Cenovus and Husky is the latest in a string of major oil and gas deals following the coronavirus pandemic, which caused oil prices to plummet earlier this year and forced companies to cut costs and look at acquisitions given how sharply stock prices have plummeted.
Cenovus shares are down an astounding 63 per cent this year and ended the trading day Friday at $4.88 each. Husky shares have fared even worse, falling almost 70 per cent since the beginning of the year and last traded at $3.17 each on the Toronto Stock Exchange.
“Both of our companies' stocks have been very volatile over the last while,” Pourbaix said. Just a year ago, Cenovus shares were trading at $11.36 each — more than twice their current price.
The investor exodus is forcing oil and gas producers to look at mergers and acquisitions in order to scale up in an attempt to attract new shareholders, said Rafi Tahmazian, a partner and senior portfolio manager at Canoe Financial.
“As long as these valuations are where they are, and the market funds flow is not coming into this sector, you're going to see more of this kind of stuff,” Tahmazian said.
The ongoing consolidation in the energy sector, however, will also lead to fresh rounds of layoffs in the oilpatch as energy companies model themselves after low-cost manufacturing operations, Tahmazian said.
“This merger should be a wake-up call to Calgarians and Albertans. What are we doing?” he said, adding the combined company would need fewer scientists and technologists to keep operating.
Pourbaix wouldn't disclose how many employees of the two companies would be laid off as a result of the deal, but confirmed, “We do expect there will be head count reductions that ultimately come out of this transaction.”
An investor presentation on the combined company lists $600 million in cash savings, including from “workforce optimizations,” indicating there will be significant layoffs when the merger is complete.
“Out of respect for our employees, we're going to take the time to share that with our employees before we talk in the media,” Pourbaix said.
The deal will turn Cenovus, a oilsands- focused
producer with stakes in two refineries in the U.S., into a more integrated oil and gas company given Husky's oilsands upgraders and refineries, network of retail fuel stations as well as its offshore oil and gas production in North America and Asia.
It will also mark the end of Husky's 80-year run as a stand-alone Canadian-based oil and gas producer.
Husky's largest shareholder, Hong Kong billionaire Li Ka-shing, will continue to be a major shareholder in Cenovus. Li's holding companies Hutchison Whampoa Europe Investments and L.F. Investments currently own roughly 70 per cent of Husky and will own 26 per cent of Cenovus when the deal closes next year.
“They are retaining their level of investment in the company. This isn't a divestment from the Canadian energy scene at all,” Husky president and CEO Rob Peabody said during an investor call Sunday. Peabody will retire following the close of the transaction.
In the end, the only remainder of Husky's brand will be its namesake network of retail fuel stations. Those fill-up stations, however, are not considered a core focus of the combined company and might be sold when market conditions improve.