Topic: Energy Stocks

Cenovus takes control of Alberta projects

Cenovus Energy

The integrated oil producer will more than double its daily output with the purchase of its partner’s share of two oil sands properties.

CENOVUS ENERGY INC. (Toronto symbol CVE; recently agreed to acquire full control of its main oil sands properties in Alberta.

Right now, the company owns 50% of the Christina Lake and Foster Creek oil sands projects; ConocoPhilips (New York symbol COP) owns the other 50%.

Cenovus will now buy ConocoPhillips’ interest in both properties, along with ConcoPhillips’ conventional oil fields in Alberta and B.C.

Note: the company will continue to ship crude to its 50%-owned oil refineries in Illinois and Texas. Phillips 66 (New York symbol PSX) owns the other 50%.

As a result of its purchases from ConocoPhillips, Cenovus’s output will rise to 588,000 barrels a day from 234,914 barrels in the first quarter of 2017. Oil sands production will account for 60% of that output.

Under the terms of the deal, ConocoPhillips will receive a total of $17.7 billion, consisting of $14.1 billion in cash plus 208 million Cenovus common shares.

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Energy Stocks: $3 billion from 187.5 million shares

To help cover the cash portion, Cenovus has sold 187.5 million common shares at $16.00 a share for gross proceeds of $3.0 billion. It has also sold $3.9 billion in new notes and arranged $4.6 billion in other loans.

That new debt will push up the company’s long-term debt to $14.8 billion. It’s a high 106% of Cenovus’s market cap.

The company aims to complete the purchase by the end of June 2017. It will then hold cash of $1 billion and have unused credit lines of $3 billion. Based on the extra production and an oil price of $50.00 U.S. per barrel (West Texas Intermediate), the company expects to generate $500 million of free cash flow (cash flow less capital expenditures) in 2018. That, along with sales of less-important properties, will help Cenovus pay down its debt.

Even so, the extra debt adds risk, particularly if oil prices decline. As a result, we’ve cut the company’s TSINetwork Rating to “Extra Risk” from “Average.”

Cenovus’s improving efficiency should help it cope with any decline in crude prices: since the start of 2014, the company has reduced its oil sands operating costs per barrel by 30%. Moreover, Cenovus already operates these oil sands projects, which cuts the risk of the purchase. Its $0.20 dividend seems safe and yields 1.4%.

Recommendation in The Successful Investor: BUY

For our comprehensive advice on making the right decisions on energy stocks today, read Canadian oil companies: Peak oil, market cycles, and the best strategy for buying the best stocks.

For our recent report on a U.S. energy stock we rate as a buy, read Cash flow spikes for Cimarex Energy.


  • Alan Roberts

    I’ve increased my holdings already, but will await the outcome of the BC election before buying more.
    Alan Roberts

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