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Employees work on an Alberta oil well partly owned by Cenovus Energy.

Brent Lewin

Cenovus Energy Inc. is bulking up in a $17.7-billion deal to more than double its production as the repatriation of Canada's oil sands winnows control of the resource to a handful of domestic players.

Cenovus said late on Wednesday that it would acquire a 50-per-cent interest in the Foster Creek and Christina Lake oil sands projects owned by partner ConocoPhillips Co., giving it full control of the steam-driven bitumen assets in the biggest oil sands deal to date.

The Calgary-based company said it would issue $3-billion in shares in a bought deal and has arranged $10.5-billion in loans to help fund the acquisition. It is also jettisoning production equivalent to 47,600 barrels a day (b/d), with proceeds aimed at repaying debt.

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Cenovus and other Canadian oil sands producers are chasing heft in a bid to lower costs as U.S. crude prices languish around $50 (U.S.) a barrel.

It marks an expensive bet by the domestic energy industry on the future of a high-cost resource that has fallen out of favour with major international players, many of which have fled in favour of investments in regions such as the Permian shale in Texas and New Mexico that offer higher returns more quickly.

The global energy companies, hit by high debt levels during the downturn, have also been frustrated by high costs, low Canadian crude margins and delays over major pipeline projects billed as key to bolstering economics in the region.

This month, Royal Dutch Shell PLC sold most of its oil sands holdings as it shifts its portfolio to focus primarily on natural gas. Marathon Oil Corp. likewise dumped its stake in a major bitumen mine. The buyer in both cases was Canadian Natural Resources Ltd., which has already spent billions expanding its massive Horizon mine.

Meanwhile, rival Suncor Energy Inc. has taken advantage of the downturn to deepen its exposure to the Syncrude mining and upgrading project while it builds the hugely expensive Fort Hills complex. Its partner in that venture, French oil giant Total SA, has pared its interest in the project. And Statoil ASA has exited the oil sands entirely.

"An optimistic view is that these domestic firms understand the market a little bit better, and they understand the regulatory space – so they kind of have an advantage and are maybe thinking they can run the assets a bit lower cost or a little more efficiently," said economist Kent Fellows of the School of Public Policy at the University of Calgary said.

"The not-so-optimistic view is you've got large multinationals pulling out, and so the guys in Alberta are getting good deals."

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The acquisition will immediately double Cenovus's total production to 588,000 barrels of oil equivalent a day. The company is working on plans to restart some expansions that were shelved after oil prices collapsed in late 2014. It recently approved a 50,000 b/d project at the Christina Lake development.

Under the deal, it is also picking up assets in the Deep Basin region of Alberta and British Columbia, including holdings in the Montney region, site of some of the richest prolific dry and liquids-rich plays in the industry. It said it plans to spend $170-million (Canadian) developing the assets this year.

Since the industry downturn began, Cenovus cut its dividend twice to preserve cash. Cenovus chief executive Brian Ferguson said the company will revisit the size of its regular payouts to shareholders once it completes asset sales that are part of the funding plan for the acquisition. Properties earmarked for sale include those in the Suffield and Pelican Lake regions of Alberta.

"In a low oil-price environment, economies of scale are important," Mr. Ferguson said on a conference call. "This deal doubles the scale of the company and this will give us a greater competitive edge," he said.

The partnership between Cenovus and ConocoPhillips dates back to 2006, when what was then Encana Corp. joined with the U.S. oil giant to announce a $11-billion (U.S.) partnership to connect oil sands production with refineries in Texas and Illinois.

The partnership was designed to reduce risk and increase profit by having Encana lead bitumen extraction operations and putting ConocoPhillips in charge of processing. It gave Encana exposure to the North American refinery business and gave ConocoPhillips a large, stable source of feedstock.

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Two years later, Encana announced plans to split into two independent energy companies – with Cenovus eventually becoming the vessel for the oil sands business and refining joint venture with ConocoPhillips. Cenovus said on Wednesday it was maintaining its interests in the U.S. refineries.

ConocoPhillips chairman and CEO officer Ryan Lance said the deal accelerates the company's planned debt reduction and plans to repurchase shares.

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