Cenovus to buy Husky Energy for $3.8B, designed to 'weather the current environment'

The chief executive of Cenovus Energy said he believesthere aremore mergers ahead for Canada's oil and gas sector after it was announced Sunday that his company was buyingrival Husky Energy.

The aim of the all-stock, $3.8-billion deal between the two Calgary-based businesses is to create a company that's stronger, more resilient and operating with "significantly reduced" risk to market volatility.

They said in a statement the new company would bewell suited to weather the current environment.

"I think we're going to see more continued consolidation," Cenovus CEO Alex Pourbaix, who will head the merged entity, toldCBC News in an interview.

"Idon't think that necessarily that our deal was a trigger for that. I just think it was inevitable. But, you know, you're seeing everybody continue to push to drive their costs down and improve their competitiveness."

Husky CEO Rob Peabody said the deal would allow the combined companies to "make better returns in a tougher environment."

Some analysts were surprised by the news Sunday morning, but Peabody said the two companies had been talking on and off for years.

"But as we revisited it, particularly coming into this year,it just seemed to be more and more compelling," he said.

He said more serious discussions began around March, took a break over summer and resumed in late August.

"And that's culminated in the deal today," he said.

Pourbaix said the combination of the two companies will mean a stronger balance sheet and the ability to pay down debt faster. He said it would also lower production costs.

Combining the companies will create annual savings of $1.2 billion, largely achieved within the first year and independent of commodity prices, the companies said.

That's likely bad news for Calgary office workers as about $400 million of the savings are expected to come from "workforce optimization," along with savings from IT and procurement, said Pourbaixduring a separate conference call with analysts.

However, he did not explicitly say there would be job losses.

"When you combine two companies with similar geographies and somewhat similar operations, you're always going to have some overlap ... in this case, there would probably be relatively a little more weight on the head office functions, just because we aren't quite as overlapping in the field," he said.

In an interview, Pourbaix said there would be ultimately be asingular headquarters in Calgary, adding that"there's a real value in getting all our employees together as soon as we can."

He saidabout $200 million in savings will come from sharing technical expertise and the other $600 million through better use of capital by focusing on assets with higher return potential.

Combined output of 750Kbarrels per day

The combined companies are expected to be able to sustain output at about 750,000 barrels of oil equivalent per day for about $2.4 billion a year, 25 per cent less than required separately, Pourbaix said.

Rory Johnston, managing director and market economist at Price Street in Toronto, called the deal a "massive announcement" that solidifies Cenovus'splace in the top three of Canadian oil producers.

He took note of the significant cost savings the deal is touting.

"That's really good news for reducing the average cost per barrel in the sector and making the sector more competitive in an increasingly competitive global oil landscape," Johnston said.

"The downside to that is a lot of the time synergies and efficiencies and cost containment usually means fewer jobs."

Johnston said he expects to see more takeovers and acquisitions over the next year but that they're more likely to be much smaller in scale, with larger producers looking to acquire smaller ones.

"I think that over the next couple of years, you'll see fewer and fewer names producing oil in the patch," he said.

"But I think those fewer and fewer names will be producing those same barrels for a lower price in a more competitive market."

The deal comes amidmore talk aboutconsolidation in an energy sector that has been battered by the twin crises of the COVID-19-related economic slowdown and low crude oil prices.

Last Monday, ConocoPhillips announced it would buy shale producer Concho Resources in a deal valued at $9.7 billion U.S. that would create one of the largest U.S. oil producers.

Earlier in the month, one analyst pointed to the acquisition of a 17.6 per cent stake in Calgary oil and gas producer NuVista Energy Ltd. by rival Paramount Resources Ltd. as part of a trend toward "forced" consolidation in the troubled Canadian energy sector.

'Blockbuster' union, analyst says

Richard Masson, an executive fellow at the University of Calgary School of Public Policy, calledthe deal between Cenovus and Huskya "blockbuster" that creates a stronger company going forward.

"The combination of the two of them better balances the overall company," Masson said.

"They're less exposed to price fluctuations for heavy oil because they have refineries that will benefit [them]when heavy oil price is low.

"And so it helps stabilize their cash flow and allows them, hopefully, if they can achieve the synergies they're striving for, to pay down their debt quicker and start growing again."

Alberta Energy Minister Sonya Savage said consolidation is not unexpected nor unprecedented in difficult economic times.

"We have no doubt Alberta's oil and gas sector will be in a strong position in meeting post-pandemic global energy demand," she said in a statement.

Cenovus's deal for Husky is valued at $23.6 billion, including debt, the companies said in a joint statement.

Husky is controlled by Hong Kong billionaire Li Ka-Shing through Hutchison Whampoa Europe Investments SARL, with 40.1 per cent, and L.F. Investments SARL, which holds 29.32 per cent of the company's common shares.

Both entities have agreed to support the transaction, which will leave them with about 27.2 per cent of the merged company. They've also agreed to a standstill agreement under which they are subject to certain voting requirements and transfer restrictions for a maximum of five years.

The merger combines Cenovus production of about 475,000 boe/d with Husky's 275,000 boe/d and their combined refining and upgrading capacity is expected to total about 660,000 barrels per day.

Cenovus owns 50 per cent of two U.S. refineries in Illinois and Texas in partnership with Phillips 66, and Husky owns a refinery in Lima, Ohio, and is a 50-50 partner with BP in a refinery in Toledo, Ohio.

Husky also has an upgrader and asphalt refinery near Lloydminster on the Alberta-Saskatchewan border which could be used to process Cenovus bitumen in future and is repairing a refinery in Wisconsin after a fire in 2018.

Husky has production from a deepwater gas project offshore China with Chinese partner CNOOC Ltd., produces oil offshore Newfoundland and Labrador and owns a chain of retail fuel stations.

Pourbaix said the retail stations may not be core to the combined company's business but they would take some time to see what the prospects are for them.

The transaction has been approved by both boards and is expected to close in the first quarter of 2021, pending shareholder and regulatory approvals.