Rivals merge as scale dominates Canadian oil sands

Canadian oil sands companies Cenovus and Husky are merging in a bid to woo investors by offering a more complete, naturally hedged operator.

Cenovus is acquiring Husky in a C$3.8bn ($2.9bn) all-stock transaction that will create Canada's third-largest producer of oil and natural gas and its second-largest refiner. The C$23.6bn company, which will continue to fly under the Cenovus flag, will have a production capacity of about 750,000 b/d of oil equivalent reaching from Atlantic Canada to Asia-Pacific, along with overall refining capacity of 660,000 b/d in the US and Canada (see table).

The deal, which is expected to close in the first quarter of 2021, would nearly double Cenovus' takeaway capacity from Alberta's oil sands region, adding 130,000 b/d to the firm's existing 135,000 b/d, with another 305,000 b/d of committed capacity on pipelines planned by the two companies. The combined firm will have 16mn bl of crude storage capacity, up from 10mn bl currently.

Management hope that investors notice the symbiotic nature of the tie-up, which brings Cenovus, more heavily weighted on production, together with Husky, a company with refining capacity that exceeds its own upstream output. But the benefits will not come without effort — the debt-laden companies have identified C$1.2bn/yr of cost savings to strengthen the merged entity's finances in a Canadian oil sector that remains desperate for capital. "We want to be in that investment-grade bracket," Cenovus chief executive Alex Pourbaix says.

The cuts will see up to 25pc of the combined company's 8,600 staff lose their jobs after the deal closes, for savings of C$400mn/yr. Capital expenditure will also be reduced, with the postponement of construction of the 75,000 b/d West White Rose project off the coast of Newfoundland.

MEG Energy — the only pure-play producer of scale in the oil sands — was the target of a hostile takeover by Husky in late 2018, but that bid was abandoned after the Alberta government used a curtailment order to artificially prop up prices, which ultimatelyimpactedcompany valuations. With 90,000 b/d of bitumen production, MEG will be dwarfed by the new-look Cenovus, but it shrugs off suggestions that it may be targeted again.

"We don't see ourselves being a driver in the consolidation business," chief executive Derek Evans says. MEG is now able to sell the lion's share of its production into the more lucrative US Gulf coast market and, like Cenovus, will be less concerned with the trademark volatility that Canadian hubs suffer from.

Ka-Shing in

As the two companies start to look less like one another, Cenovus and MEG will become more similar in terms of Chinese ownership. The majority owner of Husky, Li Ka-Shing of Hong Kong, will own 27pc of the new company once the deal closes, while China's state-owned CNOOC owns about 12pc of MEG. Several European and US firms have backed out of their Canadian oil sands investments in recent years, but Chinese firms have largely maintained the stakes they bought in the sector over the past decade. Li Ka-Shing will see Canadian production grow in his portfolio.

China's state-run firms are more focused on boosting their domestic production than on pursuing stakes in Canada's oil sands, as they have in the past. CNOOC, which acquired Calgary-based Nexen in 2013, offset lower overseas output with rising domestic production in the third quarter. China's independent refiners in Shandong province are the main drivers of the country's demand for heavy sour crude, while falling Venezuelan output in recent years has led them to turn to Canadian alternatives exported from the US Gulf coast.

By Brett Holmes and Karen Teo