Cenovus, Husky To Combine

Cenovus Energy Inc. and Husky Energy Inc. this morning announced a transaction to create a new integrated Canadian oil and natural gas company.

The companies have entered into a definitive arrangement agreement under which Cenovus and Husky will combine in an all-stock transaction valued at $23.6 billion, inclusive of debt.

The combined company will operate as Cenovus Energy Inc. and remain headquartered in Calgary. The transaction has been unanimously approved by the boards of directors of Cenovus and Husky and is expected to close in the first quarter of 2021.


  • Accretive to all shareholders on cash flow and free funds flow per share;
  • Anticipated annual run rate synergies of $1.2 billion, largely achieved within the first year, independent of commodity prices;
  • Expected free funds flow break-even at West Texas Intermediate (WTI) pricing of US$36/bbl in 2021, and at less than WTI US$33/bbl by 2023;
  • Low exposure to Western Canadian Select (WCS) locational differential risk while maintaining healthy exposure to global commodity prices;
  • Increased and more stable cash flows support investment grade credit profile;
  • Net-debt-to-adjusted-EBITDA ratio of less than two times expected to be achieved in 2022;
  • Anticipated quarterly dividend of $0.0175 per share (upon board approval) and positioned for consistent growth;
  • Husky shareholders will receive 0.7845 of a Cenovus share plus 0.0651 of a Cenovus share purchase warrant in exchange for each Husky common share.

This morning on a conference call, company executives noted that when you combine companies with similar geographies and somewhat similar operations, there will always be some overlap — this will be the case here as well.

There will be some overlap in the field but there will “probably be relatively a little more weight on the head office functions” because the companies aren’t quite as overlapped in the field.

During the call, Alex Pourbaix, Cenovus president and chief executive officer, said the companies are bringing together Cenovus’s SAGD assets at Foster Creek and Christina Lake with Husky’s extensive refining and upgrading network.

“This is enhanced by the cash flow generated by Husky’s upstream assets, which include its thermal and oilsands portfolio in Western Canada, natural gas and liquids production in the Asia Pacific region, Brent-based oil production in Atlantic Canada, and conventional production across Western Canada.”

With this transaction, the combined company will be “more resilient,” Pourbaix said, with increased and more stable free funds flow.

“Importantly, we will have new opportunities to continue expanding margins across the value chain, lowering our break-evens and accelerating deleveraging and returns to all shareholders.”

This transaction will also provide an immediate opportunity to “achieve coverage through market access, upgrading, and refining for almost all of our combined crude oil production profile,” Pourbaix added.

He said: “The combination of these two companies will reduce the commodity price volatility of both our cash flows and net asset value per share compared to the standalone companies.”

Rob Peabody, Husky president and chief executive officer, said this deal is a “great opportunity” for Husky.

“During a unique time for the oil and gas industry, in particular, we are pursuing this transaction because together, our two companies will be stronger, more competitive, efficient and profitable than either company could be on its own.”

The combined company will be Canada’s third-largest oil and gas producer, and second-largest Canadian-based refiner, he said.

Complementary portfolio

“We will be a leaner, stronger and more integrated company, exceptionally well-suited to weather the current environment and be a strong Canadian energy leader in the years ahead,” added Pourbaix. “The diverse portfolio will enable us to deliver stable cash flow through price cycles, while focusing capital on the highest-return assets and opportunities. The combined company will also have an efficient cost structure and ample liquidity. All of this supports strong credit metrics, accelerated deleveraging and an enhanced ability for return of capital to shareholders.”

The combined company will be the third largest Canadian oil and natural gas producer, based on total company production, with about 750,000 boe/d of low-cost oil and natural gas production, including 50,000 boe/d of high free funds flow generating offshore Asia Pacific production. It will be the second largest Canadian-based refiner and upgrader, with total North American upgrading and refining capacity of approximately 660,000 bbls/d which includes approximately 350,000 bbls/d of heavy oil conversion capacity.

The company will have access to about 265,000 bbls/d of current takeaway capacity out of Alberta on existing major pipelines, as well as about 305,000 bbls/d of committed capacity on planned pipelines. In addition, it will have 16 million bbls of crude oil storage capacity as well as strategic crude-by-rail assets that provide takeaway optionality.

 Peabody added: “Bringing our talented people and complementary assets together will enable us to deliver the full potential of this resilient new company. The integration of Cenovus’s best-in-class in situ oilsands assets with Husky’s extensive North American upgrading, refining and transportation network and high netback offshore natural gas production, will create a low-cost competitor and support long-term value creation.”

The transaction will result in processing capacity and egress out of Alberta for the majority of the combined company’s oilsands and heavy oil production. The company will have opportunities for margin enhancement through strategically located upstream assets integrated with the upgrading complex at Lloydminster, Saskatchewan, large U.S. refining assets in PADD 2 and PADD 3, and storage and blending operations at Hardisty, Alta.

The integration of Cenovus’s upstream assets with Husky’s downstream and midstream portfolio will also shorten the future value chain and reduce condensate costs associated with heavy oil transportation. Cash flow stability is further underpinned by the global exposure of Husky’s offshore Asia Pacific natural gas production interests, which currently generate approximately $1 billion in annual free funds flow through sales largely under long-term contracts.

Other details

Under the terms of the definitive agreement, Husky shareholders will receive 0.7845 of a Cenovus share plus 0.0651 of a Cenovus share purchase warrant in exchange for each Husky common share. This represents a 21 per cent premium, excluding warrants, relative to Husky’s five-day volume-weighted average price per share as at Oct. 23, 2020.

Including the warrants, the premium is 23 per cent. While the transaction was originally conceived as an at-market merger, resulting in a negotiated proportionate ownership level, the respective share values have diverged during the due diligence period over the past months. This resulted in a premium for Husky shareholders based on the current share prices.

Each whole warrant will entitle the holder to acquire one Cenovus common share for a period of five years following the completion of the transaction at an exercise price of $6.54 per share. Assuming the full exercise of such warrants, the combined company would receive approximately $428 million in cash proceeds. The aggregate consideration package for Husky shareholders implies a transaction equity value for Husky of approximately $3.8 billion, and a transaction enterprise value for Husky of approximately $10.2 billion.

The transaction is structured through a plan of arrangement in respect of the securities of Husky under the Business Corporations Act (Alberta), and is subject to the approval of at least two-thirds of the votes cast by holders of Husky common shares.

Hutchison Whampoa Europe Investments S.à r.l., which holds 40.19 per cent of the Husky common shares and L.F. Investments S.à r.l., which holds 29.32 per cent of the Husky common shares, have each entered into a separate irrevocable voting support agreement with Cenovus pursuant to which each has committed to vote all of its Husky common shares, representing, in total, approximately 70 per cent of the Husky common shares, in favour of the transaction at the special meeting of Husky shareholders.

In addition, Husky will also seek the approval of at least two-thirds of the votes cast by holders of outstanding Husky preferred shares voting together as a single class. If Husky preferred shareholder approval is obtained, each Husky preferred share will be exchanged for one Cenovus preferred share with substantially the same commercial terms and conditions as the Husky preferred shares. The transaction is not conditional on Husky preferred shareholder approval and, if not obtained, the Husky preferred shares will remain outstanding in a subsidiary of the combined company.

The issuance of Cenovus common shares, warrants exercisable for Cenovus common shares and, if applicable, Cenovus preferred shares pursuant to the transaction is subject to the approval by a majority of the votes cast by holders of Cenovus common shares at a special meeting of Cenovus shareholders.

Immediately following the close of the transaction, and prior to the exercise of any warrants issued to Husky shareholders as part of this transaction, Cenovus shareholders will own approximately 61 per cent of the combined company, and Husky shareholders will own approximately 39 per cent. Immediately following the close of the transaction, Hutchison Whampoa Europe Investments S.à r.l. and L.F. Investments S.à r.l. will respectively hold approximately 15.7 per cent and 11.5 per cent of the combined company.

 “Cenovus is pleased to have Husky’s significant shareholders, with their strong ties to Canada, exceptional business capabilities and knowledge of Asia and Husky’s Asian assets in particular, become one of our long-term shareholders,” said Pourbaix. “We value the perspectives they will provide as highly successful international investors.”

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