Cenovus Energy Inc. has agreed to sell its mineral-fee-title lands and promised the buyer a slice of its future revenue in a multibillion-dollar deal that will inject much-needed cash into its coffers.
The company will collect $3.3-billion from Ontario Teachers' Pension Plan in exchange for 4.8 million acres and agreeing to pay the pension fund royalties tied to operations from three separate projects, according to a statement it released Tuesday.
The deal's architecture demonstrates how depressed oil prices and damaged balance sheets are forcing companies to be creative in order to fund projects and protect dividends. Cenovus had disclosed its desire to cash in on its mineral-fee properties, whether through an initial public offering or sale. But the decision to hand over a percentage of its future revenue was not a strategy it discussed publicly.
"It is tough to argue with $3.3-billion of cash," said Justin Bouchard, an analyst at Desjardins Securities in Calgary. "So from that standpoint, it is a big deal, it is a good deal for Cenovus. They needed the cash."
But "the price that they received for that package of assets is perhaps lower than what you would have expected," considering Cenovus will hand Teachers part of its future revenue, he said. "It is exchanging a very long cash flow stream for a lump-sum upfront cash payment."
The government does not receive royalty payments from oil and natural gas produced on so-called mineral-fee-title lands, making these assets more valuable to the landowner. These properties are royalty-free because of legacy deals stretching back to the 1880s, when Ottawa gave land to Canadian Pacific Railway. The properties' royalty-free status remains intact despite the land changing hands over 130 years.
Firms, however, can collect royalties from other companies in exchange for permitting them to produce oil and natural gas on any type of land they control. Indeed, Cenovus has agreed to pay Teachers a 9-per-cent royalty on its production on the fee land package, as well as so-called gross overriding royalties on revenue stemming from its Pelican Lake project in Northern Alberta and its efforts in Weyburn, Sask.
The gross overriding royalty at Pelican Lake will be 3 per cent, and 5 per cent on Cenovus's 50.4-per-cent stake at Weyburn, the oil sands company said. The deal is expected to close in July.
Cenovus closed at $19.97, up 1 per cent on the Toronto Stock Exchange Tuesday.
Ziad Hindo, who manages the tactical asset allocation and natural resources portfolios at Teachers, said the commodity crunch worked in the pension fund's favour.
"We view this acquisition as very opportunistic. We are capitalizing on the selloff in energy prices and energy assets over the past year," Mr. Hindo said. "It will produce cash flows for a very long period of time, so it has a very long duration, which is a good match against our liabilities that also have very long durations."
Brian Ferguson, Cenovus's chief executive officer, said in a statement that the agreement "captures significant value" from its mineral-fee-title properties in Alberta, Saskatchewan and Manitoba. The $3.3-billion will buffer the company's balance sheet and give it the ability to invest in other projects, Mr. Ferguson said. The company has cancelled its expansion projects, cut its budget, laid off 15 per cent of its work force, offered shareholders the right to reinvest dividends at a discount, and raised $1.5-billion through a bought deal, as it grapples with low commodity prices.
Canadian Natural Resources Ltd. is also considering how it could capitalize on its royalty-free land. Companies started focusing on these assets after Encana Corp. spun off its royalty land in two stages for $4.27-billion in 2014.