A worker walks near a well pad at Christina Lake, a situ oil production facility half owned by Cenovus Energy Inc. and ConocoPhillips, in Conklin, Alta., in 2013.Brent Lewin/Bloomberg
Subdued demand for Cenovus Energy Inc.'s massive share sale is a reminder to underwriters that investors remain selective about supporting large energy deals.
Based on the latest sales update, the $1.5-billion deal was roughly two-thirds sold, according to two people familiar with the offering. Additional orders since then may have been tough to drum up because the price of West Texas Intermediate crude oil fell on Wednesday.
The sale was made by way of a bought deal, which means the investment banks purchased the shares from Cenovus and are liable for re-selling them to the market.
At this point, no one seems overly worried that the offering is still underway, because such a large deal can take a while to sell – particularly when energy companies' fortunes are so heavily tied to the volatile oil price. In these jittery markets, oil and gas stocks can easily move a few percentage points each day.
But for extra safety, RBC Dominion Securities, the lead underwriter in the syndicate selling the shares, was also a heavy buyer of the stock Wednesday morning. This is a common practice in bought deals like this one, because it keeps the issuer's shares trading near the offer price.
Institutional investors have shown sizeable interest, accounting for roughly $550-million of the demand. Retail investors have stepped up to buy a similar amount. The longer the deal takes to sell, the more likely it is that the underwriters will have to rely on retail buyers. Cenovus's hefty dividend yield is particularly attractive to this group.
Had the deal sold quickly, it would have been a clear signal that investors of all stripes are willing to support Canadian energy names in this tough market. But the message now is much more mixed, and multiple people said that concerns over Cenovus's fortunes are what colour the picture the most.
Over the past few weeks, investment bankers have dropped hints that energy companies would likely need to raise funds to shore up their balance sheets. Still, an offering of this size, for a company such as Cenovus, was unexpected.
The oil sands producer resorted to the offering only after exhausting a lengthy list of other options, including: shaving $700-million off its original 2015 budget; offering shareholders the chance to reinvest dividends at a 3 per cent discount, allowing the company to hang on to more of its cash; putting expansion phases at its two developed projects on ice; cutting roughly 800 jobs; and cancelling the bulk of its conventional drilling plans in Saskatchewan and Alberta.
Cenovus also tried to sell assets. The company says it is "market-ready" to do deals tied to its royalty-free properties, borrowing a play from Encana Corp., which raked in billions by spinning off similar holdings into a new company, PrairieSky Royalty Ltd., in 2014.
"The question becomes: why didn't [Cenovus] take its fee lands public instead of issuing equity at $13 per proved [barrels of oil equivalent] with a 4.5 per cent dividend yield?," Citigroup analyst Mohit Bhardwaj wrote in a note Wednesday. "Conceivably, the cost of equity of its fee lands would be a cheaper source of equity, given where PrairieSky trades."
The trouble for Cenovus is that management did not reduce its January budget by enough to match its expected cash flow, which means the company needs new cash to fill the void. It expects to spend between $1.8-billion and $2-billion in 2015, with cash flow of between $1.3-billion and $1.5-billion coming in. The company also pays investors a total of $800-million per year in dividends.
Cenovus' two established projects – known as Christina Lake and Foster Creek – barely break even on the oil they produce today, according to Toronto-Dominion Bank analyst Menno Hulshof. Both operations need North American benchmark oil to be worth about $50 per barrel for that to happen, and it traded near that level for much of Wednesday.
Given that the deal hasn't been a home run, investment bankers will be cautious before underwriting similar offerings for other companies. Although Canadian banks were able to raise a few billion each during the financial crisis to shore up their balance sheets, those stocks are held by a wider investor base, and in many cases have better yields than energy companies do.
Tim Kiladze