The North American energy space has witnessed another major merger and acquisition (M&A) deal with Cenovus Energy Inc. CVE and Husky Energy Inc.’s recent creation of a new integrated combination to achieve more stability amid the current uncertain times. Cenovus’ C$3.8 billion (around $2.9 billion) all-share purchase of Husky Energy is expected to bring down operating expenses of the combined company, while making it significantly resilient to low crude price environment.
The deal will entitle Husky Energy shareholders 0.7845 Cenovus shares for each share they hold. It represents a 21% premium for the shareholders of Husky Energy. The deal is expected to create an entity with an enterprise value of C$23.6 billion (including debt), and a strong upstream as well as downstream portfolio. The upstream portfolio will include low-cost offshore Asia Pacific oil and gas production capacity. Notably, the huge size of the combined entity might provide it greater access to capital.
While a few investors are sceptic on the deal, bearing in mind the massive debt that was caused after Cenovus’ acquisition of oil sands assets from ConocoPhillips COP in 2017, some have welcomed it. The investors who are looking forward to the deal are excited to see the company achieve free funds flow at a breakeven WTI crude price of $36 per barrel in 2021. Moreover, the breakeven point is likely to reduce to $33 per barrel by 2023.
The integrated company is expected to have a liquidity of C$8.5 billion in undrawn credit facilities. The entity will have no bond maturities till 2022. Cenovus’ board is expected to approve a quarterly dividend of 1.75 Canadian cents per share. The transaction will create annual synergies of C$1.2 billion and reduce overhead costs.
Combined Entity’s Key Facts
The deal is likely to close in the March quarter of 2021, following which the combined entity is expected to have a production capacity of 750,000 barrels of oil equivalent per day (Boe/d) and 2P reserves of 9,000 million Boe. Cenovus is the third-largest hydrocarbon producer in Canada and the latest acquisition will enable it to decrease its output difference with the top two companies.
The entity will have a total upgrading and refining capacity of 660,000 Boe/d, along with crude storage capacity of 16 million barrels. Inclusion of Husky Energy’s downstream assets will likely enable Cenovus to better navigate through the current low margin environment in the fuel market. Importantly, the sustaining capital for the combined entity is estimated at C$2.4 billion per annum. Moreover, the integrated company aims to reach net-zero emissions goal by 2050.
The North American energy space has witnessed several M&As in the past few months. The present market situation is allowing companies with more access to capital to acquire rich assets at beaten-down prices. In a major deal, Canadian Natural Resources Limited CNQ agreed to acquire all issued and outstanding common shares of smaller rival, Painted Pony Energy, for its Northeast British Columbia assets in Canada. ConocoPhillips recently agreed to acquire Concho Resources Inc. CXO in an all-stock deal, which will create one of the largest upstream companies in the world.
The Zacks Rank #4 (Sell) stock has plunged 28.6% in the past three months compared with 22.3% decline of the industry it belongs to.
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