Skip to main content
The Globe and Mail
Support Quality Journalism
The Globe and Mail
First Access to Latest
Investment News
Collection of curated
e-books and guides
Inform your decisions via
Globe Investor Tools
Just$1.99
per week
for first 24 weeks

Enjoy unlimited digital access
Enjoy Unlimited Digital Access
Get full access to globeandmail.com
Just $1.99 per week for the first 24 weeks
Just $1.99 per week for the first 24 weeks
var select={root:".js-sub-pencil",control:".js-sub-pencil-control",open:"o-sub-pencil--open",closed:"o-sub-pencil--closed"},dom={},allowExpand=!0;function pencilInit(o){var e=arguments.length>1&&void 0!==arguments[1]&&arguments[1];select.root=o,dom.root=document.querySelector(select.root),dom.root&&(dom.control=document.querySelector(select.control),dom.control.addEventListener("click",onToggleClicked),setPanelState(e),window.addEventListener("scroll",onWindowScroll),dom.root.removeAttribute("hidden"))}function isPanelOpen(){return dom.root.classList.contains(select.open)}function setPanelState(o){dom.root.classList[o?"add":"remove"](select.open),dom.root.classList[o?"remove":"add"](select.closed),dom.control.setAttribute("aria-expanded",o)}function onToggleClicked(){var l=!isPanelOpen();setPanelState(l)}function onWindowScroll(){window.requestAnimationFrame(function() {var l=isPanelOpen(),n=0===(document.body.scrollTop||document.documentElement.scrollTop);n||l||!allowExpand?n&&l&&(allowExpand=!0,setPanelState(!1)):(allowExpand=!1,setPanelState(!0))});}pencilInit(".js-sub-pencil",!1); // via darwin-bg var slideIndex = 0; carousel(); function carousel() { var i; var x = document.getElementsByClassName("subs_valueprop"); for (i = 0; i < x.length; i++) { x[i].style.display = "none"; } slideIndex++; if (slideIndex> x.length) { slideIndex = 1; } x[slideIndex - 1].style.display = "block"; setTimeout(carousel, 2500); }

Employees torque a pipe at a wedge well at Christina Lake, an oil production facility half owned by Cenovus Energy Inc. and ConocoPhillips, in Conklin, Alta. in August, 2013.

Brent Lewin

Cenovus Energy Inc. is paying a steep price and piling on debt as it seeks scale in one of the world's most expensive places to pump crude.

Cenovus's $17.7-billion cash-and-stock deal for most of ConocoPhillips Co.'s oil-sands assets will transform the Calgary-based company into Canada's fourth-largest oil and gas producer by enterprise value. But it comes at a hefty cost: the company has arranged $10.5-billion in loans to help fund the deal, with plans to sell $3.6-billion in assets in a market analysts and investment bankers say remains spotty.

"Notably, Cenovus goes from exhibiting one of the strongest balance sheets in the peer group, to one of the most levered, with investors unlikely to find a lot of appeal at this juncture in the combination of above-average financial leverage married to assets with above average operational leverage," Raymond James Ltd. analyst Chris Cox said in a research note.

Story continues below advertisement

The firm estimates Cenovus's ratio of net debt to earnings before interest, taxes, depreciation and amortization will double in 2018 as overall leverage climbs and oil prices stay low.

Cenovus shares dropped sharply in Thursday trading on the Toronto Stock Exchange, falling below the $16-per-share bought deal the company announced as part of its funding plan.

Cenvous shares were pressured by investor concerns over the company's rising debt levels as well as questions over its ability to sell assets, though sources working on the transaction said the entire $3-billion offering sold overnight Wednesday. On Thursday, the stock closed at $15.05, down 13.75 per cent.

By contrast, ConocoPhillips surged 8.8 per cent on the New York Stock Exchange as the company pledged to pare debt levels and repurchase shares.

Cenovus is the latest Canadian energy company to fortify its holdings in the oil sands, wagering that higher crude prices will reward patient investors over time. Earlier this month, Canadian Natural Resources Ltd. added heft to its portfolio with its purchase of holdings from Royal Dutch Shell PLC. Suncor Energy Inc. has also bulked up.

The Canadian companies are taking advantage of eager sellers among global oil companies. Many are groaning under debt amassed when crude topped $100 (U.S.), and have shifted capital to locales that offer higher returns at a fraction of the cost and time it takes to tap deposits in Northern Alberta.

Statoil ASA, Shell and others have also cited high costs, pipeline constraints and concerns over rising carbon emissions as they mothballed projects and ultimately sold their interests.

Story continues below advertisement

Thomas Caldwell, chairman of Caldwell Investment Management Ltd., said Cenovus will likely benefit from a bigger footprint in the long run, given low interest rates, the somewhat improved outlook for oil prices and an increased likelihood that a new heavy-oil pipeline, such as TransCanada's Keystone XL project, will be built.

The deal gives it full control of the steam-driven Foster Creek and Christina Lake oil-sands projects, in which it previously owned a 50-per-cent stake. It also adds production in the Deep Basin region of Alberta and British Columbia.

"You've got a plant that is already in place, and you're already involved in that business. So it's not like you're going into something brand new, and untested," Mr. Caldwell said.

ConocoPhillips will maintain a toehold in the region through a stake in Cenovus and its 50-per-cent ownership in the steam-driven Surmont joint venture with French oil major Total SA. Still, the share of heavy bitumen in its corporate production mix drops to 5 per cent from 15 per cent.

Under the deal, Cenovus's total production of 588,000 barrels of oil equivalent per day will now exceed the company's ability to process it at its refineries in Texas and Illinois, leaving it vulnerable to widening price discounts caused by pipeline constraints.

The company is also on the hook under a five-year agreement for quarterly payments of $6-million (Canadian) to ConcoPhillips for every $1 of the Western Canadian Select oil price above $52 a barrel, limiting upside to rising prices.

Story continues below advertisement

"Over all, we do not believe the market will appreciate the balance of higher downside risk, with limitations on the upside benefit," Mr. Cox said.

With a report from Kelly Cryderman

Want to interact with other informed Canadians and Globe journalists? Join our exclusive Globe and Mail subscribers Facebook group

Report an error Editorial code of conduct
Tickers mentioned in this story
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies