Canada chases ‘scale,’ evidenced by blockbuster Cenovus-Husky deal
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For the past five years, the Canadian oil patch has been braced for a tsunami of takeovers.
For the past five months, that tension has built to breaking point as COVID-19 has taken hold.
For the past week, as the industry has come to terms with the sound of the first domino to fall, following Husky Energy’s acceptance of a takeover offer valued at C$23.6 billion from Cenovus Energy, attention has quickly shifted to those who are next in line.
Topping the list of targets is a rapidly fading list of foreign-based companies who are expected to follow Equinor, Devon Energy, Royal Dutch Shell, Total and ConocoPhillips who have either headed out the exit door, or are busy packing their bags.
Shell’s dwindling assets in Canada include its 10% stake in the Athabasca oil sands project all that is left after unloading most of its project share to Canadian Natural Resources, CNRL, three years ago. The company has also put its Ontario refinery on the block, joining the For Sale signs pinned on most of its refineries around the world, retaining only those it rates as “strategically essential.”
A report by Greg Pardy, an analyst at RBC Dominion Securities, said CNRL - already Athabasca’s operator and majority owner - would be the obvious buyer of those assets at a cost of C$6.3 billion to C$8.5 billion.
Others on the firing line include Chinese controlled MEG Energy, which spurned a hostile offer from Husky in 2018 for C$3.3 billion, although MEG’s debt of C$3 billion remains a stumbling block.
However, the remaining state-owned Chinese players in the oil sands - Sinopec, CNOOC and PetroChina - are expected by analysts and bankers to remain put because their properties match corporate goals of owning reserves with long-life and assured reserves.
Cenovus-Husky dealThe Cenovus-Husky deal includes a purchase price of C$3.8 billion and the assumption of C$5.2 billion in long-term debt, with the total merger valued at C$23.6 billion.
Based on the most recent estimate Cenovus has a payroll of 2,300 and Husky has 5,500 employees, of which an unknown number will be let go once redundancies and overlaps are determined.
Husky is 70% owned by Hong Kong billionaire Li Ka-Shing, while his family interests push the total over 90%. The transaction is estimated to give Cenovus shareholders 61% of the combined company, leaving Husky shareholders with 39%.
The combined production will be 750,000 barrels of oil equivalent per day (275,000 boe per day from Husky), with upgrading and refining capacity at 660,000 boe per day (250,000 boe per day from Husky). Proved and probable reserves are 9 billion boe; current takeaway pipeline capacity is 265,000 barrels per day, while planned expansion is targeted at 305,000 bpd. Crude oil storage capacity is 16 million barrels.
Issue of scaleCenovus Chief Executive Officer Alex Pourbaix, who will head the new entity, told reporters that “scale is important ... so many people in our industry right now are looking at consolidation, both to cut their costs and improve their balance sheet. So we are going to see more.”
He said the expanded heavy oil portfolio will allow the new company to better ride out commodity price fluctuations.
Rafi Tahmazian, a senior portfolio manager at Canoe Financial, told the Calgary Herald the deal is just the start of the consolidation phase.
“You have to decide if you are going to be one of the consolidators and one of the larger producers that end up in the (Western Canada) basin, or will you end up as prey? Or will you be left behind just blowing in the wind.”
Husky Chief Executive Officer Rob Peabody said that as the Canadian industry has increasing trouble attracting investment “it becomes more and more important that you have a company that actually is relevant to the global investor and to the Canadian investor.”
- GARY PARK