Cenovus Energy Inc. is acquiring Husky Energy Inc., creating Canada’s fourth-largest energy company as it copes with chronically low crude prices and investor pessimism about the industry’s fortunes.
Cenovus, known for its Alberta oil sands operations, said on Sunday it will issue shares and stock-purchase warrants to acquire Husky, adding sizable oil-refining capacity in Canada and the United States to reduce its exposure to volatile Canadian oil markets. The $3.8-billion deal offers a 21-per-cent premium to Husky’s recent share prices, and Cenovus will also take on more than $6-billion in Husky debt.
It is the latest in a spate of North American energy transactions following the drop in oil prices that accompanied the COVID-19 pandemic. Last week, ConocoPhillips announced a US$9.7-billion offer for Texas-based shale-oil producer Concho Resources.
Alex Pourbaix, Cenovus’s chief executive officer, said he and his counterpart at Husky, Rob Peabody, had discussed combining the companies at various times in recent years. Talks became serious in the summer, after the coronavirus took its toll on energy demand. Cenovus executives used the code name “Purple” and Husky adopted “Harmony” to keep a lid on the negotiations.
Even before COVID-19, Canadian energy companies struggled to attract capital after years of weak oil prices and delays in adding new export pipeline capacity, adding impetus to consolidate.
“The one thing about the pandemic that really did bring it home to me is that Cenovus’s business model, despite the incredible assets we have, [is] exposed to oil pricing in Alberta because of our relatively low integration,” Mr. Pourbaix said in an interview. “The message that I really got out of the pandemic is scale matters going forward, and companies with stronger balance sheets and more resilient business models are going to have an advantage.”
This transaction achieves that, he said. Debt levels have been problematic, not least for Cenovus after it was forced to tap its credit capacity in the spring to deal with the drop in cash flow after years of asset sales to reduce leverage. Mr. Pourbaix described that as “profoundly frustrating.”
Crude prices have recovered from the lows of April, but remain around US$40 a barrel, testing profitability across the sector.
The merger transforms Cenovus from a company focused on North American oil sands, natural gas and refining to an international producer with offshore operations off Canada’s East Coast and in the South China Sea. It better matches its heavy oil production with upgrading and refining capacity in Canada and the United States. Husky also has a retail gasoline network, a business it has tried to sell.
“This deal always came to the top as one of the most compelling deals to do, and in the course of evaluation we looked at it across all kinds of [oil and gas] price scenarios. It was always better for our shareholders – the combination versus the two stand-alone companies,” Mr. Peabody told The Globe and Mail. “The pandemic may have been a bit of a catalyst to get your mind working, but I think the underlying fundamentals of the deal really stand up in all price scenarios.”
The two companies say the combined entity will be the third-largest Canadian oil and gas producer, based on total output, with about 750,000 barrels of oil equivalent a day. It will be fourth-largest by market capitalization with $9.2-billion, behind Canadian Natural Resources Ltd., Suncor Energy Inc. and Imperial Oil Ltd.
However, the price of the deal shows how much value has left the Canadian energy sector as global investors soured. At its peak in May, 2008, the market cap of Husky, a company controlled for decades by Hong Kong billionaire Li Ka-shing, topped $47-billion.
Husky shares are down 68.2 per cent year-to-date, while Cenovus is down 62.5 per cent. Both are among the six worst-performing energy stocks in the S&P/TSX Composite Index this year, according to an analysis performed using S&P Global Market Intelligence.
The resulting company plans annual capital spending of $2.4-billion, a reduction of more than $600-million a year compared with the stand-alone plans, they say. Overhead and other cost savings are pegged at another $600-million annually.
The projections foreshadow significant job-cutting in Calgary, where the oil patch downturn has wounded the city’s downtown core. Alberta’s energy sector has already shed tens of thousands of jobs since oil prices fell in late 2014. The two companies currently employ 8,600 staff and contractors, and job cuts are expected to be “material.” Mr. Pourbaix declined to give a number, however.
Mr. Pourbaix will lead the combined operations, while Husky’s Jeff Hart will serve as its chief financial officer. Jon McKenzie, who left Husky to be Cenovus’s CFO in 2018, will be chief operating officer. Cenovus director Keith MacPhail will serve as independent board chair.
Husky shareholders will receive 0.7845 of a Cenovus share plus 0.0651 of a Cenovus share purchase warrant for each Husky share. Each whole warrant will entitle the holder to acquire a Cenovus share for $6.54 each; the warrants expire in five years.
Cenovus was created as the oil-focused spinoff of the former Encana Corp., now Ovintiv Inc., in 2009. In 2017, it bought the Canadian oil sands and natural gas assets of ConocoPhillips for $17.7-billion, a deal that displeased the market and led to a steep decline in the stock, a CEO change and a major debt-reduction exercise.
Husky’s roots date back to heavy oil production in Wyoming in the late 1930s. Two decades ago, Mr. Li merged it with Renaissance Energy, and companies controlled by the Li family have had a majority stake since then. That interest will be 27 per cent in the combined company.
With a report from Andrew Willis in Toronto
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