Cenovus Energy Inc. Makes a Big Deal: Worth a Buy?

Cenovus Energy Inc. (TSX:CVE)(NYSE:CVE) is making a large acquisition which should change the trajectory of the company in a big way.

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The Motley Fool

The big news after the markets closed yesterday was that Cenovus Energy Inc. (TSX:CVE)(NYSE:CVE) would be buying the 50% stake in the Foster Creek Christina Lake partnership from ConocoPhillips (NYSE:COP) for $17.7 billion. It’s also acquiring the majority of ConocoPhillips’s Deep Basic conventional assets in Alberta and British Columbia. Due to the size of Cenovus, this is the type of acquisition that can significantly change the trajectory of the company.

Is it worth buying the stock on news of this acquisition? Let’s look at the deal.

According to Cenovus, the assets it’s acquiring are forecasted to produce just shy of 300,000 barrels of oil equivalent every day. Management is predicting that it will result in an 18% increase to adjusted funds flow per share in 2018 compared to its original forecast. Further, management expects that the acquisition will reduce its full-year 2018 operating costs per barrel of oil equivalent by 16% along with a 26% drop in general and administrative costs per barrel of oil.

If we look at its production numbers, the company is in a great position. It was projected that the company would produce 290,000 barrels of oil per day. Before asset sales and with the acquisition, that jumps to 588,000 barrels of oil a day in 2017, which catapults the company into an entirely new position in the oil sands business.

Post asset sales in 2018, with full-year numbers, Cenovus will generate 515,000 barrels a day. Looking at the three-year outlook, the company sees an opportunity to boost production by an additional 125,000 barrels per day with near-term capacity growth.

But how is Cenovus funding the deal? According to a presentation, the company is launching a $3 billion common equity deal; said another way, it’s going to issue more shares to the public, so it has the cash to pay for it. Another $3.6 billion will come from cash and available credit with the rest coming from new debt, some asset sales, and “vendor take-back equity.” All in all, Cenovus is confident that the transaction is fully funded. And while dilution is an annoyance, if it helps the company scale significantly, it’s worth it.

So, now we come back to the important question: Is it worth buying Cenovus on the acquisition?

My strategy for buying securities is relatively straight forward when it comes to news. I buy the rumour and sell the news. In this instance, there was no rumour — only news — so I wouldn’t buy immediately. Wait for the initial excitement to die down and then determine a fair value for the company.

That being said, this acquisition makes Cenovus very appealing because it increases its adjusted funds flow, while decreasing its operating cost per barrel and its general and administrative costs. If the price of oil is going to increase, the profits generated will be significant. So, my strategy is to see how things go with the acquisition and then start loading up on shares. That being said, buying stock in a company that is effectively going to double in size is not a bad idea, irrespective of timing.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Jacob Donnelly has no position in any stocks mentioned.

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