2-for1 Sale
Cenovus Energy Inc.(TSX:CVE)(NYSE:CVE) was facing a crucial test of credibility when it announced a $17.7 billion deal to acquire assets from its oil sands partner, ConocoPhillips, this year.
Investors punished this highly leveraged transaction by sending its stock down 40% on fears that the deal would load the company’s balance sheet with a lot of debt at a time when oil prices have plunged, and there was no meaningful recovery in sight.
To fund this massive undertaking, Cenovus took a $3.6 billion load bridge loan, which it said it will pay by selling some of its energy assets.
For the company, the acquisition was a win-win. In one stroke, Cenovus had doubled its production from the fields it knows very well. The acquired assets include ConocoPhillips’s 50% interest in the FCCL Partnership, the oil sands venture which was jointly owned with and operated by Cenovus, as well as the majority of ConocoPhillips’s Deep Basin conventional assets in Alberta and British Columbia.
The latest developments suggest that the company is right on target to meet its goal of raising cash it needed to pay down its debt.
Assets sales accelerating
On October 19, Cenovus announced that it agreed to sell its Palliser crude field to Schlumberger Ltd. and Torxen Energy for a deal valued at $1.3 billion. With the Palliser sale, Cenovus has announced about $2.8 billion in divestitures to help pay off that bridge loan.
Calgary-based Cenovus is targeting $4-5 billion in divestitures this year and is still marketing its Weyburn operation in Saskatchewan.
The Palliser divestiture in southern Alberta “will significantly allay concerns that the company may not reach its asset sales target by the end of this year,” Paul Cheng, an analyst at Barclays Plc, said in a research note, cited by Bloomberg News. The company has “tangible momentum” in lowering its debt load.
Apart from asset sales, Cenovus also surprised many investors when it announced a better than expected second-quarter earnings and showed how quickly it can turn newly acquired assets into cash.
Cenovus made $0.237 a share net profit in the second quarter, beating analysts’ forecast of $0.02 profit a share.
Cenovus’s free cash flow surged by 128% to $465 million when compared to the same period a year ago, helped by 65% boost in its output to 436,929 barrels of oil equivalent per day in the quarter.
Investor takeaway
Trading at $12.51, Cenovus shares are up ~30% in the past one month. This performance suggests that the company is gaining its lost ground fast on the back of smart deal making.
If you are looking to add a good momentum stock to your portfolio, then Cenovus seems to be a good contrarian bet, especially since oil prices have been firming up around $50 a barrel.
