Cenovus Energy Inc. (TSX: CVE) (NYSE: CVE) and Husky Energy Inc. (TSX: HSE) have entered into a definitive arrangement agreement to merge in an all-stock transaction valued at CAD23.6 billion (USD18 billion), inclusive of debt.
The transaction will create a new integrated Canadian oil and natural gas company with an advantaged upstream and downstream portfolio that is expected to provide enhanced free funds flow generation and superior return opportunities for investors.
The combined company will operate as Cenovus Energy Inc. and remain headquartered in Calgary, Alberta, Canada.
The transaction has been unanimously approved by the Boards of Directors of Cenovus and Husky and is expected to close in the first quarter of 2021.
Highly Complementary Integrated Portfolio
The combination has low exposure to Alberta oil pricing while maintaining healthy exposure to global commodity prices. It will unlock market opportunities by uniting high-quality and low-cost oil sands and heavy oil assets with extensive midstream and downstream infrastructure, creating a global competitor able to optimize margin capture across the heavy oil value chain.
“We will be a leaner, stronger and more integrated company, exceptionally well-suited to weather the current environment and be a strong Canadian energy leader in the years ahead,” said Alex Pourbaix, Cenovus president and chief executive officer. “The diverse portfolio will enable us to deliver stable cash flow through price cycles, while focusing capital on the highest-return assets and opportunities. The combined company will also have an efficient cost structure and ample liquidity. All of this supports strong credit metrics, accelerated deleveraging and an enhanced ability for return of capital to shareholders.”
The combined company will be the third largest Canadian oil and natural gas producer, based on total company production, with about 750,000 barrels of oil equivalent per day (BOE/d) of low-cost oil and natural gas production, including 50,000 BOE/d of high free funds flow generating offshore Asia Pacific production. It will be the second largest Canadian-based refiner and upgrader, with total North American upgrading and refining capacity of approximately 660,000 barrels per day (bbls/d), which includes approximately 350,000 bbls/d of heavy oil conversion capacity. The company will have access to about 265,000 bbls/d of current takeaway capacity out of Alberta on existing major pipelines, as well as about 305,000 bbls/d of committed capacity on planned pipelines. In addition, it will have 16 million barrels of crude oil storage capacity as well as strategic crude-by-rail assets that provide takeaway optionality.
Rob Peabody, Husky president and chief executive officer, said, “Bringing our talented people and complementary assets together will enable us to deliver the full potential of this resilient new company. The integration of Cenovus’s best-in-class in situ oil sands assets with Husky’s extensive North American upgrading, refining and transportation network and high netback offshore natural gas production, will create a low-cost competitor and support long-term value creation.”
The transaction will result in processing capacity and egress out of Alberta for the majority of the combined company’s oil sands and heavy oil production. The company will have opportunities for margin enhancement through strategically located upstream assets integrated with the upgrading complex at Lloydminster, Saskatchewan, large U.S. refining assets in PADD 2 and PADD 3, and storage and blending operations at Hardisty, Alberta, Canada. The integration of Cenovus’s upstream assets with Husky’s downstream and midstream portfolio will also shorten the future value chain and reduce condensate costs associated with heavy oil transportation. Cash flow stability is further underpinned by the global exposure of Husky’s offshore Asia Pacific natural gas production interests, which currently generate approximately CAD1 billion (USD) in annual free funds flow through sales largely under long-term contracts.
- Accretive to all shareholders on cash flow and free funds flow per share
- Anticipated annual run rate synergies of CAD1.2 billion (USD758 million), largely achieved within the first year, independent of commodity prices
- Expected free funds flow break-even at West Texas Intermediate (WTI) pricing of USD36 per barrel (bbl) in 2021, and at less than WTI USD33/bbl by 2023
- Low exposure to Western Canadian Select (WCS) locational differential risk while maintaining healthy exposure to global commodity prices
- Increased and more stable cash flows support investment grade credit profile
- Net-debt-to-adjusted-EBITDA ratio of less than 2x expected to be achieved in 2022
- Anticipated quarterly dividend of CAD0.0175 per share (upon Board approval) and positioned for consistent growth
- Husky shareholders will receive 0.7845 of a Cenovus share plus 0.0651 of a Cenovus share purchase warrant in exchange for each Husky common share