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    Canada’s Cenovus, Husky in C$24bn Merger


Combined company will be third largest Canadian producer

by: Dale Lunan

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Canada’s Cenovus, Husky in C$24bn Merger

Canadian integrated oil and gas producers Cenovus Energy and Husky Energy said October 25 they would combine in an all-stock transaction valued at C$23.6bn (US$18bn), inclusive of debt.

The arrangement has been approved by the boards of both companies, and is expected to close in Q1 2021, pending court, shareholder and regulatory approvals. The combined company will operate as Cenovus Energy, with Cenovus CEO Alex Pourbaix leading the new executive team. Keith McPhail, chair of the Cenovus board of directors, will serve as independent chair of the new board.

Husky CFO John Hart will stay on in the same role at the emerging company, while Jonathan McKenzie, executive vice-president and CFO at Cenovus will serve as the new COO; both will also be named executive vice-presidents. Additional senior executives will be selected from both companies and named prior to the close of the transaction, while the new board will consist of eight directors named by Cenovus and four named by Husky.

“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,” Pourbaix said. “The diverse portfolio will enable us to deliver stable cash flow through price cycles, while focusing capital on the highest-return assets and opportunities.”

Immediately following the close of the transaction, Cenovus shareholders will hold about 61% of the combined company, with Husky shareholders holding the remaining 39%. Hutchison Whampoa Europe Investments, controlled by Hong Kong billionaire Li Ka-shing, holds 40.19% of Husky and will own 15.7% of the combined company.

Cenovus and Husky are both primarily involved in the western Canadian crude oil and bitumen sectors, and the combined company will rank as the third largest in Canada, with daily average production of 750,000 barrels of oil equivalent (boe) and upgrading and refining capacity of 660,000 boe/day.

In Q2 2020, Cenovus had average natural gas production of 392mn ft3/day, used primarily as fuel for its thermal oil sands operations, while Husky had 574.6mn ft3/day of natural gas production, including 328.7mn ft3/day in western Canada and 245.9mn ft3/day in offshore China and Indonesia.

Offshore China, Husky holds 49% of the Liwan Gas Project with partner Cnooc in the South China Sea, which delivered first production in 2014. In Indonesia, it is advancing several gas projects in the Madura Strait, including the producing liquids-rich BD project and the development of the shallow-water MDA-MBH and MDK fields, which are expected to produce first gas volumes in the 2022-2023 timeframe.

Under the agreed plan of arrangement, Husky shareholders will receive 0.7845 Cenovus shares plus 0.0651 Cenovus share purchase warrants for each Husky share, representing a 21% premium, exclusive of warrants, relative to Husky’s five-day volume-weighted average price as at October 23. Including the warrants, the premium is 23%.

Each whole warrant gives the holder the right, for five years, to acquire one Cenovus common share at an exercise price of C$6.54/share. Assuming the full exercise of the warrants, the combined company would receive about C$428mn in cash, while the entire transaction package implies a transaction equity value for Husky of about $3.8bn and a transaction enterprise value for Husky of about C$10.2bn.