Canada’s Cenovus Energy announced on Sunday that it has entered into an agreement to snap up Husky Energy in an all-stock transaction valued at C$23.6 billion ($17.97 billion), inclusive of debt.
Cenovus (CVE) said that the deal will create the third-largest Canadian oil and natural gas producer, with production of 750,000 barrels of oil equivalent per day (BOE/d) of low-cost oil and natural gas. Under the terms of the agreement, Husky shareholders will receive 0.7845 of a Cenovus share plus 0.0651 of a Cenovus share purchase warrant in exchange for each Husky common share. This represents a 21% premium, excluding warrants, relative to Husky’s five-day volume-weighted average price per share as of Oct. 23.
The deal implies a transaction equity value for Husky of about C$3.8 billion, and a transaction enterprise value of about C$10.2 billion. The combined company is expected to generate an incremental C$1.2 billion of annual free funds flow, comprised of C$600 million in annual corporate and operating synergies and C$600 million in annual capital allocation synergies.
“We will be a leaner, stronger and more integrated company, exceptionally well-suited to weather the current environment and be a strong Canadian energy leader in the years ahead,” said Cenovus CEO Alex Pourbaix. “The diverse portfolio will enable us to deliver stable cash flow through price cycles, while focusing capital on the highest-return assets and opportunities. The combined company will also have an efficient cost structure and ample liquidity.”
“All of this supports strong credit metrics, accelerated deleveraging and an enhanced ability for return of capital to shareholders,” Pourbaix added.
The combined company will operate as Cenovus Energy and remain headquartered in Calgary, Alberta. The two companies said in a joint statement that the transaction has been unanimously approved by its boards of directors and is expected to close in the first quarter of 2021. Following the closure of the transaction, Cenovus expects its board to approve a quarterly dividend of C$0.0175 per share.
Shares in Cenovus, which owns oil and natural gas operations across Alberta and British Columbia, along with refineries in Illinois and Texas, have been hit hard amid the pandemic-led oil price crisis and have tanked 63% so far this year. (See Cenovus stock analysis on TipRanks)
Goldman Sachs analyst Neil Mehta last month initiated coverage of the stock with a Buy rating and a $6 price target (62% upside potential). Mehta believes that the company’s free cash flow generation will help bring drive down leverage levels and strengthen its balance sheet.
The rest of the Street is cautiously optimistic on the stock. The Moderate Buy analyst consensus splits into 5 Buys, 4 Holds and 1 Sell. The $5.44 average price target indicates 47% upside potential from current levels.
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