Cenovus Energy Inc. (TSX:CVE)(NYSE:CVE) has agreed to acquire ConocoPhillips' 50% interest in the FCCL Partnership, the companies' jointly owned oil sands venture operated by Cenovus. Cenovus is also purchasing the majority of ConocoPhillips' Deep Basin conventional assets in Alberta and British Columbia. Combined, these assets have forecast 2017 production of approximately 298,000 barrels of oil equivalent per day (BOE/d). The acquisition is immediately accretive to key metrics, and, assuming the successful completion of a planned divestiture program, is expected to result in an 18% increase in 2018 adjusted funds flow per share compared with Cenovus's original 2018 forecast. Total consideration for the purchase is $17.7 billion, including $14.1 billion in cash and 208 million Cenovus common shares. The cash component is fully financed with a portion of cash on hand, existing credit facility capacity and committed bridge loans. As part of the transaction, Cenovus has also agreed, in certain circumstances, to make contingent payments to ConocoPhillips. The transaction is expected to close in the second quarter of 2017, subject to customary conditions, including the receipt of necessary regulatory approvals, and has an effective date of January 1, 2017. Concurrent with the acquisition, Cenovus has launched a bought-deal offering of common shares for expected gross proceeds of approximately $3 billion. The bought-deal offering is detailed in a separate news release issued by Cenovus today.
"This transformational acquisition allows us to take full control of our best-in-class oil sands projects and to add a second growth platform across the prolific Deep Basin that provides complementary short-cycle development opportunities," said Brian Ferguson, Cenovus President & Chief Executive Officer. "The acquisition is accretive and significantly increases Cenovus's growth potential. Going forward, we plan to focus capital spending on these two value platforms. At the same time, we intend to divest a significant portion of our legacy conventional assets to help fund the transaction."
The new Cenovus
Over the past two-and-a-half years, Cenovus has taken decisive steps to build and maintain a strong balance sheet and reduce costs. As a result, the company has the financial resilience to pursue this transformational acquisition. Since 2014, Cenovus's focus on cost efficiency and innovation has led to a 30% reduction in its per-barrel oil sands operating costs and general and administrative expenses as well as a 50% reduction in oil sands sustaining capital costs. With anticipated future cost reductions, opportunities to improve reservoir performance and the potential to develop its large portfolio of emerging assets, Cenovus will be well positioned at the close of this acquisition to create significant value across a substantially larger oil sands resource and production base.
Including the addition of a second growth platform in the Deep Basin, the transaction is expected to be immediately accretive over the course of the company's current three-year business plan. Assuming the successful completion of planned divestitures, Cenovus expects the acquisition will result in an 18% increase in 2018 adjusted funds flow per share compared with the company's original 2018 forecast.
At close, Cenovus will immediately become Canada's largest thermal oil sands producer and one of the country's largest oil and gas producers. On a pro forma basis, the company will have existing production capacity of 390,000 barrels per day (bbls/d) at Foster Creek and Christina Lake. Across its broader portfolio, Cenovus also has a number of regulatory approvals for future capacity additions. Upon completion of this acquisition, including both its existing production capacity and future capacity additions, the company will have a substantial inventory of regulatory approved oil sands projects.
"The purchase of these assets is consistent with Cenovus's existing strategy and core competencies," said Ferguson. "Consolidating our ownership at Foster Creek, Christina Lake and Narrows Lake has consistently ranked as our best strategic opportunity to increase leverage to a portfolio of top-tier oil sands assets. I'm confident this transaction will create substantial shareholder value for years to come."
With 100% ownership of the FCCL Partnership assets, Cenovus will enjoy the full benefit of its plan to resume construction on the phase G expansion at Christina Lake. The company anticipates the expansion can be completed with go-forward capital investment of between $16,000 and $18,000 per flowing barrel. Module assembly has already resumed for phase G, which has a design capacity of 50,000 bbls/d. Field construction is expected to ramp up to full activity by mid-2017, with first oil expected in the second half of 2019.
At its Investor Day in June 2017, Cenovus intends to provide an update on its plans for Foster Creek phase H and Narrows Lake phase A, including expectations for capital costs and timing for each project. Foster Creek phase H has a design capacity of 30,000 bbls/d and Narrows Lake phase A has a design capacity of 45,000 bbls/d.
"With two recently completed expansion phases ramping up, construction resuming at Christina Lake phase G, potential restarts at Foster Creek and Narrows Lake in 2018 and 2019 and full ownership of the FCCL asset base, we have a clear line of sight to five years of growth that should take our oil sands production capacity to over half a million barrels per day," said Ferguson. "In addition, we're acquiring a hard-to-replicate position in the highly economic, liquids-rich Deep Basin, providing another platform to generate significant additional production and adjusted funds flow growth throughout our current three-year business plan and beyond."
In 2017, Cenovus intends to spend approximately $170 million on the acquired Deep Basin assets. Beginning with a three-rig drilling program in 2017, with plans to expand thereafter, Cenovus believes these properties have the potential for production to grow from an estimated 120,000 BOE/d in 2017 to approximately 170,000 BOE/d in 2019, a more than 40% increase. The company expects to retain key Deep Basin technical operating and business staff as part of the acquisition. Cenovus will also enter into a two-year technical services agreement providing access to ConocoPhillips' expertise in developing and operating the Deep Basin assets.
Downstream integration remains an essential component of Cenovus's strategy. The company's 50% interest in each of the Wood River Refinery in Illinois and Borger Refinery in Texas, operated by partner Phillips 66, reduces Cenovus's exposure to wider light-heavy oil price differentials.
Cenovus intends to update its guidance estimates for 2017 when the transaction closes.
Christina Lake (on a pro forma, 100%-owned basis)
Over the past two-and-a-half years, Cenovus has focused on strengthening its balance sheet and improving its cost structure while actively evaluating its organic portfolio for potential acquisition and divestiture opportunities. This has resulted in strategic asset sales, a reduction in the company's dividend to a sustainable level and the decision to decrease its workforce by approximately one third.
This disciplined approach, combined with the substantial cost reductions Cenovus has realized, enabled the company to end 2016 with cash and cash equivalents of approximately $3.7 billion as well as $4.0 billion in undrawn capacity under its committed credit facility, with no debt maturities until the fourth quarter of 2019.
Transaction is fully funded
Cenovus's financial strength has enabled it to develop a strategic financing plan that meets the funding needs of the proposed acquisition, demonstrates commitment to investment grade credit ratings and helps preserve the company's financial resilience after the transaction is completed. Cenovus has $10.5 billion of fully underwritten bridge financing facilities in place with Royal Bank of Canada and J.P. Morgan Chase Bank. Concurrent with this announcement, the company has also launched a bought-deal offering of common shares for expected gross proceeds of approximately $3 billion, the details of which are contained in a separate news release issued by Cenovus today.
Cenovus will use the net proceeds from the bought-deal offering, a portion of existing cash on hand, available capacity on its existing committed credit facility and its committed bridge financing to pay for the cash portion of the purchase price. The remainder of the acquisition purchase price will be paid in the form of 208 million Cenovus common shares. In addition, Cenovus anticipates a subsequent offering of senior debt, as well as select asset divestitures. The timing of the subsequent offering of senior debt and asset sales is subject to prevailing market conditions. Proceeds will be used to satisfy the company's bridge financing obligations, which extend for periods ranging from 12 to 24 months.
Maintaining financial resilience
Cenovus is committed to maintaining its financial resilience following the closing of the transaction and will look to fund its attractive organic growth opportunities with internally generated cash flow. The company also remains committed to maintaining its long-standing investment grade credit ratings from S&P Global Ratings and DBRS Limited as well as the investment grade credit rating recently received from Fitch Ratings. Cenovus's first priority following completion of the acquisition will be to optimize its asset portfolio and capital structure, including repaying its outstanding bridge loans. In addition to the financing arrangements related to the acquisition, Cenovus plans to extend the maturities on the tranches of its existing committed credit facility to 2020 and 2021.
"We believe we've developed a solid financing plan for this acquisition - one that will also help us preserve our financial strength once the transaction is completed," said Ivor Ruste, Cenovus Executive Vice-President and Chief Financial Officer. "We also view the vendor's decision to receive Cenovus common shares as a strong vote of confidence in the financial and operating outlook for our company going forward."
Cenovus continues to focus on total shareholder return and will consider the optimal level of its dividend once the company's divestiture of non-core assets is substantially complete, taking into account factors such as future production growth, realized cost reductions and sustained margin improvements. Declaration of dividends will remain at the sole discretion of Cenovus's Board of Directors.
Over the long term, Cenovus continues to target a debt-to-adjusted EBITDA ratio of 1.0 to 2.0 times and debt to capitalization of 30% to 40%.
Divesting non-core conventional assets
Concurrent with this acquisition, Cenovus has begun marketing its legacy Alberta conventional assets at Pelican Lake and Suffield. Advisors have been retained and data rooms are open. Combined, these assets produced approximately 47,600 BOE/d in 2016, consisting of nearly 29,000 bbls/d of crude oil and 112 million cubic feet per day (MMcf/d) of natural gas. Cenovus plans to divest additional non-core conventional assets to streamline its portfolio. The proceeds from the successful sale of the Pelican Lake and Suffield assets, and other associated asset sales, are expected to be applied against the company's outstanding bridge loans.
Vendor take-back terms
ConocoPhillips has agreed to receive, as part of the purchase price consideration, 208 million common shares of Cenovus. In relation to the share consideration, at closing Cenovus and ConocoPhillips will enter into an investor agreement, and a registration rights agreement which, among other things, will restrict ConocoPhillips from selling or hedging its Cenovus shares for a period of six months from the closing date of the transaction. ConocoPhillips will also be restricted from nominating new members to Cenovus's Board of Directors and must vote its Cenovus shares in accordance with management recommendations or abstain from voting.
Contingent payment terms
At closing, Cenovus and ConocoPhillips have agreed to enter into a five-year contingent payment agreement related to the acquired portion of FCCL oil sands production that triggers when the price of Western Canadian Select (WCS) rises above C$52/bbl. The terms of the contingent payment agreement will allow Cenovus to retain 80% to 85% of WCS prices above C$52/bbl, based on current gross FCCL production capacity. As production capacity increases with future expansions, the percentage of upside available to Cenovus will increase further.
For the five-year term of the agreement, Cenovus will make contingent payments to ConocoPhillips for each quarter in which the average daily price of WCS is above C$52/bbl. The payments will be calculated by multiplying C$6 million by the amount the average daily WCS price exceeds C$52/bbl. The calculation includes an adjustment mechanism related to certain significant production outages which may reduce the amount of a contingent payment. There are no maximum payment terms.
J.P. Morgan and RBC Capital Markets are acting as lead financial advisors while Bennett Jones LLP, Blake, Cassels & Graydon LLP and Paul, Weiss, Rifkind, Wharton & Garrison LLP are acting as lead legal advisors to Cenovus.
Conference Call and Presentation
2:45 p.m. Mountain Time (4:45 p.m. Eastern Time)
Cenovus has posted a slide presentation with details of the acquisition on its website at cenovus.com.
The company will also host a conference call today, March 29, 2017, starting at 2:45 p.m. MT (4:45 p.m. ET). To participate, please dial 888-231-8191 (toll-free in North America) or 647-427-7450 approximately 10 minutes prior to the conference call. A live audio webcast of the conference call will also be available via cenovus.com. The webcast will be archived for approximately 90 days.
Cenovus Energy Inc.
Cenovus Energy Inc. is a Canadian integrated oil company. It is committed to applying fresh, progressive thinking to safely and responsibly unlock energy resources the world needs. Operations include oil sands projects in northern Alberta, which use specialized methods to drill and pump the oil to the surface, and established natural gas and oil production in Alberta and Saskatchewan. The company also has 50% ownership in two U.S. refineries. Cenovus shares trade under the symbol CVE, and are listed on the Toronto and New York stock exchanges. For more information, visit cenovus.com.
SOURCE: Cenovus Energy Inc.
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