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Megadeal shakes up oil sands Transaction worth C$17.7B to double Cenovus production, also adds natural gas; Conoco freed to pursue Eagle Ford, Permian interests Gary Park For Petroleum News
The unparalleled shuffle of oil sands assets in Alberta has made another leap forward with a blockbuster sale of ConocoPhillips holdings to its upstream partner Cenovus, fueling the debate over winners and losers.
The C$17.7 billion deal, including C$14.1 billion in cash and the transfer of 208 million Cenovus shares, follows on the heels of the exodus from northern Alberta of other foreign-based companies, led by the Netherland’s Royal Dutch Shell, Houston-based Marathon Oil, France’s Total and Norway’s Statoil.
For Cenovus, the acquisition will give the company “full control of our best-in-class oil sands project,” while turning the pure-play company into a significant natural gas producer by creating a “second-growth platform across the prolific Deep Basin (in British Columbia and Alberta),” said Chief Executive Officer Brian Ferguson.
There was also speculation, unconfirmed by Cenovus, that the company would try to raise about C$1.8 billion to help fund the transaction from the sale of conventional assets sales in a spotty market.
Ferguson, without delving into the details, said only that following closure of the deal “our top priority will be to optimize our asset portfolio and capital structure, including repaying the outstanding bridge loans” of C$10.5 billion.
Immediate impact The immediate impact on Cenovus is to hike its oil sands production to 356,000 barrels per day from its current 178,000 bpd and to raise conventional oil and natural gas to 232,000 barrels of oil equivalent per day from 112,000 boe per day, for an overall gain to 588,000 boe per day from 290,000 boe per day.
Proved plus probable reserves will post a 106 percent increase to 7.76 billion boe from 3.79 billion boe.
As a result, Cenovus will become Canada’s largest thermal oil sands producer and the deal will give it a portfolio of more than 3 million net acres in the Deep basin, plus a “large inventory of short-cycle drilling opportunities with high-return potential.”
Since 2014, Cenovus has given priority to cost efficiency and innovation, leading to a 30 percent reduction in its per-barrel oil sands operating costs.
The return to 100 percent ownership of its Foster Creek-Christina Lake assets will allow Cenovus to resume construction of its seventh Christina Lake phase, which has design capacity of 50,000 bpd, and also sets the stage for it to proceed with the eighth phase of Foster Creek, adding another 30,000 bpd. It also plans to update the initial phase of its Narrow Lake project, designed for 45,000 bpd.
For 2017, Cenovus intends to invest about C$170 million in the Deep basin, targeting an increase in output of 50,000 boe per day to 170,000 boe per day.
Cenovus investors not ecstatic Regardless of that glowing outlook, investors were less than ecstatic, driving down Cenovus shares by 13 percent on the day after the blockbuster announcement was made, apparently uncomfortable with the gamble on higher oil prices and the projected increase in the company’s net debt to C$13.5 billion.
“Notably, Cenovus goes from exhibiting one of the strongest balance sheets in the peer group to one of the most levered,” Raymond James analyst Chris Cox told clients.
Adding to the bad after-taste is Cenovus’ plan to raise more than C$3 billion as it sells as many as 215 million shares.
Brian Bagnell, an analyst with Macquarie Capital Markets, said that if Cenovus hopes to achieve a meaningful reduction of its debt and leverage it will need West Texas Intermediate crude prices of well above US$50 per barrel on a sustained basis.
Dennis Fong, an analyst with Canaccord Genuity, estimated the company could see its cash flow per share decline by 5 percent for each US$1 dip in WTI prices.
Even if oil prices to enter a durable recovery phase, Cenovus is expected to lose 15 percent to 20 percent based on contingency payments promised to ConocoPhillips.
Conoco tightens Eagle Ford grip On the wins-and-losses side for ConocoPhillips, the deal is expected to free the company to pursue quicker-return opportunities as it tightens its long-term grip on the Texas Eagle Ford shale, giving it access to a vast supply of low-cost oil, while claiming an emerging position in the Permian basin of more than 200,000 net acres, the eighth-largest stake in that play.
Although far behind the industry-leading stake of EOG Resources, which has 600,000-plus Eagle Ford acres, ConocoPhillips has moved ahead of its peers in several brackets - accumulating 3,500 drilling locations (compared with EOG’s 1,925 premium sites) that are profitable at sub-US$50 oil and an estimated 2.4 billion barrels of oil equivalent resource potential.
As strong as ConocoPhillips’ Eagle Ford stake is, the company’s Permian position could be even stronger at 1 million net acres in the play, trailing Occidental Petroleum at 2.5 million acres and ExxonMobil at 1.75 million acres.
The company’s Chairman and Chief Executive Officer Ryan Lance said the transaction is “accretive to our cash margins and lowers the average cost of supply of our portfolio.”
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