Cenovus Acquires Husky Energy in All-Stock Deal
The transaction will align two integrated companies and reduce exposure to the heavy oil discount.
On Oct. 25, no-moat Cenovus Energy (CVE) announced it will combine with Husky Energy (HUSKF) in an all-stock deal. Husky shareholders will receive 0.7845 shares of Cenovus in exchange for each share of Husky’s stock. The exchange represents a 21% premium to Husky’s Oct. 23 closing price but is considerably less than our previous fair value estimate of CAD 6. In addition, Husky shareholders will also receive 0.0651 of Cenovus purchase warrants for each share. The warrants carry a CAD 6.54 strike price that can be exercised within five years of the transaction’s completion date. Currently, Cenovus’ shares are trading just above CAD 4 per share. The transaction is expected to close during the first quarter of 2021.
The combined company will operate as Cenovus Energy, and Alex Pourbaix will continue in his role as CEO. The transaction will align two integrated companies and reduce exposure to the heavy oil discount. Cenovus possesses attractive upstream oil sands assets but has limited midstream and downstream options to offset any spikes in the heavy oil discount, while Husky Energy brings significant refining capacity in Canada and the U.S. Cenovus is now expected to produce over 750,000 barrels of oil per day, which would make the company Canada’s third-largest hydrocarbon producer, and will have 660 mbbl/d of refining and upgrading capacity.
Once the transaction is completed, Cenovus expects to realize CAD 1.2 billion in annual synergies and reduce its corporate break-even to $36/bbl WTI from its current break-even of $38/bbl. Management expects the break-even to fall to $33/bbl by 2023. Management also expects to reinstate the company’s dividend, offering a quarterly payment of CAD 0.0175 per share.
As a result of the transaction, we are lowering our fair value estimate for Cenovus to $6.50/CAD 9 per share from $7.50/CAD 10 and increasing our fair value estimate for Husky to $5/CAD 7 from $4.50/CAD 6. We are maintaining our no moat rating for both companies.
|Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.|
Joe Gemino does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.