The jury is still out with the Husky acquisition

Cenovus Energy is a large integrated oil and gas company based in Canada. The company owns oil sand projects in northern Alberta as well as natural gas and oil fields in Alberta and British Columbia. It also owns a 50% stake in two U.S. refineries. Cenovus’ portfolio of assets got a boost with the acquisition of most of ConocoPhillips’ operations in Western Canada in 2017. 

Cenovus Energy sells oil to industrial users, wholesalers, and commodity purchasers, all around the world. An extensive network of pipelines, rail, and marine tankers transport the company’s products. A vast portfolio of oil sands assets and Deep Basin natural gas and liquids assets in Western Canada should support production growth.

With the combination with Husky, the company’s portfolio now consists of high-quality oil sands and heavy oil assets with extensive trading, supply and logistics infrastructure, and downstream infrastructure.

The company’s reportable segments are Upstream (~60% of 2020 gross sales) and downstream (~40%). The Upstream segment comprises oil sands, conventional, and offshore while the downstream segment consists of Canadian manufacturing, Retail and US manufacturing. The total production from Cenovus’s upstream assets averaged ~472,000 BOE/d and the refineries processed ~372,000 gross barrels per day of crude oil feedstock in 2020.

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Investment Data
 

Revenue Growth & Market Exposure

Cenovus formally came into existence in 2009 as a result of a spin-off from Encana but has a history dating back to the 1880s. An integrated business model continues to generate significant value through its refining and marketing activities along with its top-tier asset base and low-cost structure.

Cenovus’s stake in U.S. refineries mitigates the risk of heavy oil differentials. Moreover, with the Husky acquisition, Cenovus’s exposure to Alberta heavy oil price differentials has further reduced. Premium asset quality, executional excellence, an integrated model, and a strong reputation are Cenovus’s key competitive strengths. 

Canadian energy companies have faced a tough time last year. Crude oil demand continued to be negatively impacted by the effects of the COVID-19 pandemic on one hand, while production cuts by leading oil companies also decreased the global supply of crude oil on the other. The pandemic further led to a low global oil price environment. The average realized crude oil sales price reached $28.82/ bbl in 2020 compared with $53.95/bbl the previous year. 

Cenovus completed the acquisition of Husky in January 2021 resulting in the creation of the third-largest Canadian oil and natural gas producer and the second-largest Canadian-based refiner and upgrader. The proforma company will have a production capacity of 750,000 BOE/d and an upgrading and refining capacity of 660,000 BOE/d.

Cenovus also implemented a new five-year business plan that should deliver ~$11 billion in cumulative free funds flow through 2024, using mid-cycle commodity prices. The company continued to reduce its capital spending as well as strategically managed its oil sands production to combat oil price volatility in 2020.

Dividends

Cenovus Energy has been paying dividends since 2009. However, it announced a temporary suspension of its dividend in response to the low global crude oil price environment from April – December 2020. It resumed a dividend of $0.0175/ share, payable March 2021, which is 65% below the previous level. The current dividend sports a modest yield of 0.74%.

Cenovus and Husky combination has resulted in an efficient cost structure and ample liquidity. The transaction is expected to be accretive immediately resulting in $1.2 billion in synergies and $600 million in cash flow savings. The combined company will operate as Cenovus Energy and the combined assets will provide cash flow stability.

While the acquisition will result in cost savings on production and operational performance, it will also lead to an increase in the overall debt levels. The company also announced a 2021 budget for the combined company that will focus on sustaining capital and generating free funds flow on the back capturing transaction-related synergies across the organization. It positions the company to achieve about $400 million in annual corporate and operating synergies and an estimated $600 million in capital allocation synergies in 2021. 

Cenovus is in the process of deleveraging its balance sheet by selling its legacy conventional assets which will streamline its portfolio. The company exited 2020 with net debt of $7.2 billion but following the close of the Husky transaction, Cenovus had net debt of ~$13 billion.

Cenovus is focusing on mid-term strategies to broaden its market access for crude oil production and on new pipeline projects connecting it to new markets in the U.S. and globally. It is also developing new pipeline projects in Western Canada that will provide access to new buyers.

Competition

The Canadian and international petroleum industry is highly competitive. Cenovus competes with other large Canadian energy giants including Suncor Energy, which is the largest oil producer in Canada, Canadian Natural Resources which is a large independent natural gas and heavy crude oil exploration and production company in Canada, and Imperial Oil which is another large integrated energy company.

Moreover, oil companies are subject to fluctuating commodity prices, and government and global regulations. There is uncertainty regarding the future actions of big oil-producing nations that may also lead to increased commodity price volatility.

TickerKeyTickerCompanySectorIndustryScoreQuoteMarket CapP/EFPEEPSYield RawYieldPayoutRatioPaymentsDividendChowderGrowthRatingIncomeRatingTollboothAmbassadorAchieverAristocratKingCountryGraph
TSE:SUSUSuncorEnergyOil & Gas Integrated0.4026.1331.830.000.00-2.830.03213.211.000040.840.137134Consumable - NecessitiesNONONONOCanada1
TSE:IMOIMOImperial OilEnergyOil & Gas Integrated0.4630.9318.150.000.00-2.530.02852.851.000040.880.106765Consumable - NecessitiesNOYESYESNOCanada1
TSE:CVECVECenovus EnergyEnergyOil & Gas Integrated0.209.5115.330.000.00-1.940.00740.741.000040.070.007412IntermediateNONONONOCanada1

Bottom Line

Cenovus Energy’s acquisition of Husky is expected to deliver a greater ability to reduce free funds flow volatility and accelerate debt reduction and returns to shareholders.

The company also expects to achieve nearly $1 billion of synergies this year as a result of the acquisition putting it on track to reach the planned $1.2 billion in annual run-rate synergies by the end of 2021. Its 2021 budget includes a sustaining capital of ~$2.1 billion to deliver upstream production of ~755,000 BOE/d and downstream throughput of ~525,000 bbls/d. 

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