Cenovus Energy -11% as massive deal seen increasing debt, leverage
Cenovus Energy (CVE -11.5%) slumps to 52-week lows following its purchase of ConocoPhillips’ (COP +8.7%) Canadian assets catapults, which catapults the company into the top three in the oil sands but the amount of debt it is taking on is raising red flags.
CEO Brian Ferguson called the deal “a unique opportunity to take full control of our oil sands assets,” during a conference call, adding that it would double CVE’s total production and reserves; he also said CVE plans to sell off its Pelican Lake oil sands properties and some light oil assets in Alberta as a result of the deal, and the company would revisit its dividend once those assets sold.
But analysts say the deal will weigh on shares in the near-term; Raymond James' Chris Cox says CVE takes on a “noticeably higher risk profile” after the deal, and investors are unlikely to see any appeal in the decision to deploy capital towards acquisitions rather than buybacks.
Morgan Stanley's Benny Wong says the deal simplifies CVE's operating structure and decision making, and buying producing assets that are familiar and top-tier is a “much more welcome scenario for the market rather than accelerating spend to develop new projects and have to wait several years before seeing cash flow.”
Canaccord's Dennis Fong says the price paid for the assets is fair, but the diversification from oil sands may confuse investors, yet he sees a sound strategic basis in acquiring assets which can aid in showing short-cycle growth and provide a source for natural gas liquids.
