Cenovus Acquires Husky Energy in All-Stock Deal

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.

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