Cenovus Risks Ratings Downgrade with $17.7-Billion ConocoPhillips Buy
Calgary-based Cenovus Energy Inc. will likely see its credit rating take a hit after announcing a C$17.7-billion to acquire ConocoPhillips’ tar sands/oil sands and natural gas holdings in Alberta and northeastern British Columbia.
The deal “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 Globe and Mail reports. “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.”
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The latest deal, which doubles Cenovus’ tar sands/oil sands production and reserves, is “a unique opportunity to take full control of our oilsands assets,” said President and CEO Brian Ferguson. “Given that we already fully operate the assets, we are effectively doubling our oilsands exposure with no integration risk,” he added. “We also view this transaction as a strategic opportunity to establish an expansive presence in the Deep Basin,” a geological formation on the northeastern front of the Rocky Mountains.
“The deal will turn Cenovus into the third-largest oilsands producer, behind only Canadian Natural Resources Ltd. and Suncor Energy Inc.,” the Financial Post reports. But it isn’t sitting well with credit rating agency DBRS Ltd., which raised flags over the additional debt the company is taking on to close the deal.
“Depending on proceeds raised from asset sales (which are targeted for debt reduction), a rating downgrade is likely,” DBRS analysts wrote.
Cenovus “has arranged $10.5-billion in loans to help fund the acquisition,” the Globe notes. “It is also jettisoning production equivalent to 47,600 barrels a day, with proceeds aimed at repaying debt.”
While initial reports had Cenovus stock gaining value on the deal, the Post says shares were down 13% yesterday. “Notably, Cenovus goes from exhibiting one of the strongest balance sheets in the peer group, to one of the most levered,” Raymond James analyst Chris Cox wrote in a note to investors. “Those types of numbers are hard for the market to ignore,” states Post reporter Jonathan Ratner. To break even and significantly reduce its debt, Cenovus will need oil prices to stay above US$50 per barrel “on a sustained basis.”
For ConocoPhillips, the deal is a “win-win” that will allow the company to reduce its debt, CBC reports. “ConocoPhillips Canada will now focus exclusively on our Surmont oilsands and the liquids-rich Blueberry-Montney unconventional asset,” said Chairman and CEO Ryan Lance.
Analysts saw two possible interpretations for the string of defections from Alberta’s tar sands/oil sands.
“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,” University of Calgary economist Kent Fellows told the Globe. “The not-so-optimistic view is you’ve got large multinationals pulling out, and so the guys in Alberta are getting good deals.”
An analysis last week by DeSmog Canada contrasted the “bullish long-run view” held by Canadian fossils with their international counterparts’ focus on shale oil.
“If you look at it from the buyers’ perspective, these are companies that see more value in the assets than the sellers do. It’s basic sales dynamics,” said University of Alberta energy economist Andrew Leach, who chaired Alberta’s climate advisory team. On the other side, “the reason Shell, Total, and Statoil are pulling out, and the reason that Exxon has had to write down much of its Kearl Lake reserves, isn’t because of the emissions profile of the oilsands bitumen,” economist and author Jeff Rubin told DeSmog. “It’s rather because it doesn’t make any economic sense, before we even look at emissions pricing.”