December 1, 2020

Market and Financial News Aggregator

Posthaste: Who’s next?: Cenovus shares fall 8% in futures, but analysts see new mega M&A wave on the way

4 min read

Good morning!

The ever-shrinking Canadian oilpatch saw a major shakeup over the weekend with Cenovus Energy Inc. acquiring Husky Energy Inc. in all-share deal worth $3.8 billion.

The Canadian oil sector, a shadow of its former self, has been struggling with pandemic-related weak demand, low crude oil prices and regulatory  risks, with many once-sturdy balance sheets in a fragile state during the past eight months.

While many companies have been kicking tires to suss out bargains, the Cenovus-Husky deal took some by surprise.

Here are the five takeaways from the Cenovus-Husky deal:

1 Strange bedfellows
Citibank analyst Prashant Rao notes that “it’s not a deal we wanted, but it could work out in the long-term.”

Long-suffering Husky Energy Ltd. shareholders will be elated for the premium they will receive, but it “leaves us scratching our heads from a CVE angle,” Rao said, noting that it could dampen Cenovus’ 12-18 month share price upside potential. “We expect CVE shares to be down meaningfully on Monday,” the analyst wrote.

Cenovus was trading around 8.36 per cent lower this morning to US$3.43 per share in U.S. futures market.

“We question why this deal needed to happen now, versus 6-12 months from now, when CVE’s equity could’ve been a more premium currency versus HSE’s,” Rao wrote.

While the Cenovus management’s thinking is understandable, delivering on the synergies and showing improved operational performance at the asset level are required to prove out the deal’s merits, given the heavy debt load, analysts said.

The takeover is valued at $23.6 billion when debt is included.

2 M&A Wave
The great upheaval in the global oil sector has companies jettisoning non-core assets or courting new partners to strengthen their balance sheets.

Amid this scenario, analysts expect major international players such as Royal Dutch Shell Plc., Equinor SA, Conoco Phillips and others that have interests in Canada, to find new ways to monetize their assets.

Domestic producers may also see value in merging.

Eight Capital analyst Phil Skolnick says it’s likely the start of big deals in Canadian energy land, and runs through a mouth-watering list of possible mergers:

“This is likely just the start of big deals in Canadian energy land,
and thus it begs the question of who is next? As seen in the U.S. with the accelerated M&A activity, when there’s one meaningful transaction, there’s likely more to come,” said Skolnick, citing Canadian Natural Resources Ltd. and Imperial Oil Ltd (which is majority owned by Exxon Mobil Corp.) as a possible merger potential.

Other deals could be a Suncor and Imperial tie-up, or even a Canadian Natural and Suncor merger, apart from MEG Energy being taken over by either Imperial or Canadian Natural, the analyst wrote in a note this morning.

The domestic junior and intermediate space is also likely to see more deals, Skolnick said.

3 Hello, Asia
The deal gives Cenovus some relief from the toxic regulatory and political environment in North America that’s jeopardized the prospects of pipelines and the wider oilsands sector.

Husky’s offshore Asia Pacific natural gas production interests currently generate approximately $1 billion in annual free funds flow through sales largely under long-term contracts, and could help the combined company expand its horizon.

It could also somewhat shield Cenovus from the likely restrictive energy policies that may emerge from a potential Joe Biden victory in the U.S. elections.

4 More hedging
Acquiring Husky will boost Cenovus’s production to about 750,000 barrels a day of oil equivalent from about 475,000 now. But perhaps more importantly, it will gain substantial downstream assets, namely additional refinery and pipeline capacity, according to a Bloomberg analysis.

“That will equip Cenovus to refine and upgrade 70 per cent of its crude at its own refineries. The company says that will leave it less exposed to Western Canada Select, the local benchmark price, which usually trades at a discount of more than $10 a barrel to West Texas Intermediate, partly because of pipeline constraints,” Bloomberg said in its report.

5 COO of the hour
Cenovus has been among the most creative in finding ways to get to market. And it’s current chief financial officer Jon McKenzie is expected to play a key role in this merger as he was the CFO of Husky till 2018.

McKenzie will be elevated to the key role of chief operating officer of the combined entity. He also has experience working at Suncor and Irving Oil, and his intimate knowledge of both Husky and Cenovus makes him a central figure in ensuring the success of the new entity.

“To that end, McKenzie will be COO, which makes sense given he has intimate knowledge of HSE’s assets and people (i.e., he would know of any skeletons in the closet),” said Eight Capital’s Skolnick.

Yadullah Hussain


2020-10-26 08:24:35


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