The companies have entered into a definitive arrangement agreement under which Cenovus and Husky will combine in an all-stock transaction valued at
Transaction highlights:
- Accretive to all shareholders on cash flow and free funds flow per share
- Anticipated annual run rate synergies of
$1.2 billion , largely achieved within the first year, independent of commodity prices - Expected free funds flow break-even at West Texas Intermediate (WTI) pricing of
US$36 per barrel (bbl) in 2021, and at less than WTIUS$33 /bbl by 2023 - Low exposure to Western Canadian Select (WCS) locational differential risk while maintaining healthy exposure to global commodity prices
- Increased and more stable cash flows support investment grade credit profile
- Net-debt-to-adjusted-EBITDA ratio of less than 2x expected to be achieved in 2022
- Anticipated quarterly dividend of
$0.0175 per share (upon Board approval) and positioned for consistent growth - Husky shareholders will receive 0.7845 of a Cenovus share plus 0.0651 of a Cenovus share purchase warrant in exchange for each Husky common share
An Integrated Oil and Natural Gas Leader – Key Facts | |||
Standalone Cenovus1 | Standalone Husky1 | Pro forma company1 | |
Production (BOE/d) | ~475,000 | ~275,000 | ~750,000 |
Upgrading & refining capacity (BOE/d) | ~250,000 | ~410,000 | ~660,000 |
2P reserves (mmBOE) | ~7,000 | ~2,000 | ~9,000 |
Takeaway capacity from Current pipelines Planned pipelines/expansions | ~135,000 ~275,000 | ~130,000 ~30,000 | ~265,000 ~305,000 |
Crude oil storage (mmbbls) | ~10 | ~6 | ~16 |
Sustaining capital ($billion per year) | 1.2 | 1.8 | 2.4 |
Commitment to ESG leadership | Ambition to achieve net zero emissions by 2050; specific ESG targets and plan to be announced post close |
1 Based on year-to-date production.
Highly Complementary Integrated Portfolio
The combination has low exposure to
“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
The combined company will be the third largest Canadian oil and natural gas producer, based on total company production, with about 750,000 barrels of oil equivalent per day (BOE/d) of low-cost oil and natural gas production, including 50,000 BOE/d of high free funds flow generating offshore
The transaction will result in processing capacity and egress out of
Strategic and Financial Benefits of the Combination
Cenovus and Husky combined are expected to be stronger, more competitive, efficient and profitable than either company on its own.
Immediate and tangible savings and improved capital allocation opportunities
The combined company is expected to generate an incremental
The anticipated
The expanded portfolio will enable more efficient, returns-focused capital allocation. The company is expected to sustain production levels and downstream operations with an anticipated annual capital investment of
Enhanced free funds flow generation and investment grade metrics
The combined company is expected to be free funds flow breakeven in 2021 at WTI prices of
The company’s priority will be to maximize free funds flow by focusing investments on sustaining capital expenditures. In the current environment, free funds flow generation will position the combined company to achieve a net-debt-to-adjusted-EBITDA target of less than 2x in 2022, without the need for asset dispositions. Along with the combined entity’s lower free funds flow breakeven threshold, the combined company will offer an accelerated deleveraging capability relative to either company on a standalone basis.
The funds flow profile of the combined company supports investment grade credit metrics and a lower cost of capital through the commodity price cycle. At closing, the combined company is expected to have ample liquidity with
After achieving its balance sheet objectives, the company expects to generate sufficient free funds flow to be able to consider sustainable growth in shareholder distributions and a returns-focused organic capital investment program with residual free funds flow. Following the close of the transaction, Cenovus is anticipating the Board’s approval of a quarterly dividend of
Uncompromising Commitment to Safety and Sustainability Leadership
The commitments both Cenovus and Husky have made to world-class safety performance and environmental, social and governance (ESG) leadership will remain core to the combined company. This includes ambitious ESG targets, robust management systems and transparent performance reporting. The company will continue working to earn its position as a global energy supplier of choice by advancing clean technology and reducing emissions intensity. This includes maintaining the ambition established by each company independently of achieving net zero emissions by 2050. Cenovus will also make it a priority to continue building upon the strong local community relationships already established by both companies, with a focus on Indigenous economic reconciliation.
The targets Cenovus and Husky released earlier this year for their key ESG focus areas are the products of robust processes to ensure alignment with the companies’ business plans and strategies. Cenovus remains committed to pursuing ESG targets and will undertake a similarly thorough analysis before setting meaningful targets for the new portfolio. Once that work is complete in 2021 and approved by the Board, the new targets and plans to achieve them will be disclosed. Leading safety practices, strong governance and advancing diversity and inclusion will remain central to the company’s ESG commitments.
Management and Board Leadership – Committed to Successful Integration
The combined company will be led by a proven management team reflecting the strengths of both organizations, with a track record of strong safety performance, operational excellence and cost and capital discipline, along with downstream and midstream expertise.
Additional senior executives for the combined company will be selected from top talent at both companies and named by the close of the transaction.
The management team will be complemented by a Board of Directors consisting of eight directors identified by Cenovus and four directors identified by Husky.
Transaction Details and Governance
Under the terms of the definitive 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 at
Each whole warrant will entitle the holder to acquire one Cenovus common share for a period of five years following the completion of the transaction at an exercise price of
The transaction is structured through a plan of arrangement in respect of the securities of Husky under the Business Corporations Act (
The issuance of Cenovus common shares, warrants exercisable for Cenovus common shares and, if applicable, Cenovus preferred shares pursuant to the transaction is subject to the approval by a majority of the votes cast by holders of Cenovus common shares at a special meeting of Cenovus shareholders.
Immediately following the close of the transaction, and prior to the exercise of any warrants issued to Husky shareholders as part of this transaction, Cenovus shareholders will own approximately 61% of the combined company, and Husky shareholders will own approximately 39%. Immediately following the close of the transaction, Hutchison Whampoa Europe Investments S.à r.l. and L.F. Investments S.à r.l. will respectively hold approximately 15.7% and 11.5% of the combined company.
“Cenovus is pleased to have Husky’s significant shareholders, with their strong ties to
In addition to the voting support agreements, Hutchison Whampoa Europe Investments S.à r.l. and L.F. Investments S.à r.l. have also each entered into a separate standstill agreement with Cenovus, taking effect at closing, under which they will each be subject to certain voting requirements, transfer restrictions and other standstill restrictions for a maximum term of five years following completion of the transaction. All other shareholders holding 5% or more of the combined company at closing of the transaction that do not have existing similar rights, will also be provided with customary registration and pre-emptive rights upon request.
The Board of Directors of each of Cenovus and Husky have unanimously approved the arrangement agreement and support the transaction. Details of the transaction will be included in a joint information circular that Cenovus and Husky expect to mail to their respective shareholders by mid-November. The special shareholder meetings of both companies are expected to be held in December.
In addition to shareholder approvals, the transaction is subject to regulatory approvals, as well as the approval of the Court of Queen’s Bench of
The transaction is expected to close in the first quarter of 2021.
Further details regarding this strategic transaction will be available on Cenovus’s and Husky’s SEDAR profiles at sedar.com and on Cenovus’s website at cenovus.com and Husky’s website at huskyenergy.com.
Any questions or requests for further information regarding the plan of arrangement and the special meetings to be held to consider the proposed transaction should be directed to
Advisors
Hutchison Whampoa Europe Investments S.à r.l.’s legal advisors are
Conference Call Today |
The companies will host a joint conference call and webcast today, Media will join in listen only mode. |
Advisory
Basis of Presentation
All financial figures and information have been prepared in Canadian dollars (which includes references to "dollars" and "$"), except where another currency has been indicated, and in accordance with International Financial Reporting Standards ("IFRS" or "GAAP") as issued by the
Non-GAAP Measures
Certain financial measures in this news release do not have a standardized meaning as prescribed by IFRS, such as adjusted EBITDA, adjusted free funds flow, free funds flow, net debt and netback, and therefore are considered non-GAAP measures. These measures may not be comparable to similar measures presented by other issuers. These measures have been described and presented in order to provide shareholders, potential investors and analysts with additional measures for analyzing the transaction. This additional information should not be considered in isolation or as a substitute for measures prepared in accordance with IFRS.
Adjusted EBITDA is a non-GAAP measure defined as net earnings before finance costs, interest income, income tax expense, depreciation, depletion and amortization, exploration & evaluation write-down, goodwill impairments, asset impairments and reversals, unrealized gains (losses) on risk management, foreign exchange gains (losses), revaluation gain, re-measurement of contingent payment, gains (losses) on divestiture of assets, and other income (loss), net, calculated on a trailing 12-month basis.
Net-debt is a non-GAAP measure defined as short-term borrowings, and the current and long-term portions of long-term debt, net of cash and cash equivalents and short-term investments. Free funds flow is a non-GAAP measure defined as adjusted funds flow less capital investment.
Adjusted funds flow is a non-GAAP measure commonly used in the oil and gas industry to assist in measuring a company’s ability to finance its capital programs and meet its financial obligations. Adjusted funds flow is defined as cash from (used in) operating activities excluding net change in other assets and liabilities and net change in non-cash working capital. Non-cash working capital is composed of accounts receivable, inventories (excluding non-cash inventory write-downs and reversals), income tax receivable, accounts payable and income tax payable. Net change in other assets and liabilities is composed of site restoration costs and pension funding.
Netback is a non-GAAP measure commonly used in the oil and gas industry to assist in measuring operating performance on a per-unit basis. Cenovus's and Husky's netback calculation is aligned with the definition found in the Canadian Oil and Gas Evaluation Handbook (“COGE Handbook”). Netbacks reflect the margin of Cenovus on a per-barrel of oil equivalent basis. Netback is defined as gross sales less royalties, transportation and blending, operating expenses and production and mineral taxes divided by sales volumes. Netbacks do not reflect non-cash write-downs or reversals of product inventory until it is realized when the product is sold. The sales price, transportation and blending costs, and sales volumes exclude the impact of purchased condensate. Condensate is blended with the heavy oil to transport it to market.
Barrels of Oil Equivalent
Natural gas volumes have been converted to barrels of oil equivalent ("BOE") on the basis of six Mcf to one barrel ("bbl"). BOE may be misleading, particularly if used in isolation. A conversion ratio of one bbl to six Mcf is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent value equivalency at the wellhead. Given that the value ratio based on the current price of crude oil compared with natural gas is significantly different from the energy equivalency conversion ratio of 6:1, utilizing a conversion on a 6:1 basis is not an accurate reflection of value.
Note Regarding Forward-Looking Information
This news release contains certain forward-looking statements and forward-looking information (collectively referred to as "forward-looking information") within the meaning of applicable securities legislation, including the
This forward-looking information is identified by words such as “achieve”, “aim”, “ambition”, “anticipate”, “believe”, “can be”, “capacity”, “committed”, “commitment”, “continue”, “could”, “drive”, “enhance”, “ensure”, “estimate”, “expect”, “focus”, “forecast”, “forward”, “future”, “guidance”, “maintain”, “may”, “objective”, “opportunity”, “outlook”, “plan”, “position”, “potential”, “priority”, “re-establishing”, “strategy”, “should”, “target”, “will”, or similar expressions and includes suggestions of future outcomes, including statements about: the timing and completion of the plan of arrangement and the acquisition of all issued and outstanding Husky common shares and Husky preferred shares, if applicable; the timing and anticipated receipt of required regulatory, court and securityholder approvals for the transaction and other customary closing conditions; Cenovus's ability to issue securities pursuant to the transaction; the anticipated benefits of the transaction, including corporate, operational and other synergies and the timing thereof; the ability to integrate the businesses of Cenovus and Husky, anticipated margins and reductions to free funds flow break-even at WTI, excluding one-time transaction related costs; expected free funds flow; planned capital allocation and capital investment program; anticipated savings and the sustainability and timing thereof; the expected exposure to WCS oil prices,
Developing forward-looking information involves reliance on a number of assumptions and consideration of certain risks and uncertainties, some of which are specific to Cenovus, Husky and the combined company and others that apply to the industry generally. The factors or assumptions on which the forward-looking information is based include, but are not limited to: the satisfaction of the conditions to closing of the transaction in a timely manner and complete the arrangement on the expected terms; accretive to shareholders in the first year of the combination excluding one-time costs of the transaction; the combined company's ability to successfully integrate the businesses of Cenovus and Husky; access to sufficient capital to pursue any development plans associated with full ownership of Husky; the combined company's ability to issue securities; the impacts the transaction may have on the current credit ratings of Cenovus and Husky and the credit rating of the combined company following closing; forecast commodity prices, light-heavy crude oil price differentials and other assumptions identified in the 2020 guidance of Cenovus; the potential further ramp down for forecast production volumes based on business and market conditions; projected capital investment levels, the flexibility of capital spending plans and associated sources of funding; achievement of further cost reductions and sustainability thereof; applicable royalty regimes, including expected royalty rates; future improvements in availability of product transportation capacity; the ability of underlying pricing fundamentals to support the continuation of crude-by-rail programs; changes in transportation costs following suspension of crude-by-rail programs; increases to the combined company's share price and market capitalization over the long term; opportunity for the combined company to pay dividends, and the approval and declaration of such dividends by the board of the combined company; opportunities to repurchase shares for cancellation at prices acceptable to the combined company; cash flows, cash balances on hand and access to credit and demand facilities being sufficient to fund capital investments; foreign exchange rate, including with respect to the combined company's US$ debt and refining capital and operating expenses; realization of expected capacity to store within oil sands reservoirs barrels not yet produced, including that the combined company will be able to time production and sales of its inventory at later dates when demand has increased, pipeline and/or storage capacity has improved and crude oil differentials have narrowed; the Government of Alberta’s mandatory production curtailment continuing to narrow the differential between WTI and WCS crude oil prices thereby positively impacting cash flows for the combined company; the WTI-WCS differential in
The forward-looking information in this news release also includes financial outlooks and other forward-looking metrics (including production, financial and oil and gas related metrics) relating to Cenovus, Husky, the combined company and the transaction, including: the expectations of Cenovus and Husky regarding the impact of the transaction on free funds flow, funds flow breakeven at WTI, net-debt-to-adjusted-EBITDA, deleveraging capability, the projected capital expenditures of the combined company, sustaining capital, undrawn committed credit facilities, general and administrative costs, expenses per BOE and operating costs.
Our forecast for the combined company reaching a net-debt-to-adjusted-EBITDA ratio of less than 2x in 2022 is based on
Year | WTI | WTI-WCS differential | 3-2-1 Crack | CAD/USD exchange rate |
2021 | ||||
2022 | ||||
2023 |
The risk factors and uncertainties that could cause actual results to differ materially from the anticipated results or expectations expressed in this press release, include: the completion and the timing of the transaction; the ability of Cenovus and Husky to receive, in a timely manner, the necessary regulatory, court, securityholder, stock exchange and other third-party approvals; the ability of Cenovus and Husky to satisfy, in a timely manner, the other conditions to the closing of the transaction; interloper risk; the ability to complete the transaction on the terms contemplated by the arrangement agreement between Cenovus and Husky, and other agreements, including the support agreements or at all; the ability of the combined company to realize the anticipated benefits of, and synergies from, the transaction and the timing thereof; failure to achieve and sustain future cost reductions; the timing of the commencement and completion of construction activities, first production and sales, if at all; the impacts of a changing risk profile and possible subjection to a credit rating review, which may result in a downgrade or negative outlook being assigned to the combined company; the ability of the combined company to pay dividends and the approval and declaration of such dividends by the board of the combined company; the potential exposure to political, economic or social instability related to Husky's international operations; the consequences of not completing the transaction, including the volatility of the share prices of Cenovus and Husky, negative reactions from the investment community and the required payment of certain costs related to the transaction; actions taken by government entities or others seeking to prevent or alter the terms of the transaction; potential undisclosed liabilities unidentified during the due diligence process; the accuracy of the pro forma financial information of the combined company after the transaction; the interpretation of the transaction by tax authorities; the success of business integration; the focus of management's time and attention on the transaction and other disruptions arising from the transaction; the ability to access or implement some or all of the technology necessary to efficiently and effectively operate the assets and achieve expected future results; volatility of and other assumptions regarding commodity prices; the duration of the market downturn; a resurgence in cases of COVID-19, which has occurred in certain locations and the possibility of which in other locations remains high and creates ongoing uncertainty that could result in restrictions to contain the virus being re-imposed or imposed on a more strict basis, including restrictions on movement and businesses; the extent to which COVID-19 impacts the global economy and harms commodity prices; the extent to which COVID-19 and fluctuations in commodity prices associated with COVID-19 impacts the business, results of operations and financial condition, all of which will depend on future developments that are highly uncertain and difficult to predict, including, but not limited to the duration and spread of the pandemic, its severity, the actions taken to contain COVID-19 or treat its impact and how quickly economic activity normalizes; the success of new COVID-19 workplace policies and the ability of people to return to workplaces; continued liquidity being sufficient to sustain operations through a prolonged market downturn; WTI-WCS differential in
Statements relating to "reserves" and "resources" are deemed to be forward-looking information, as they involve the implied assessment, based on certain estimates and assumptions, that the reserves and resources described exist in the quantities predicted or estimated, and can be profitably produced in the future.
Readers are cautioned that the foregoing lists of factors are not exhaustive. Events or circumstances could cause the combined company's actual results to differ materially from those estimated or projected and expressed in, or implied by, the forward-looking information. Readers should carefully consider the risk factors discussed in each of Cenovus's and Husky's management's discussion and analysis and annual information form for the year ended
You should not place undue reliance on the forward-looking information contained in this news release, as actual results achieved will vary from the forward-looking information provided herein and the variations may be material. Cenovus and Husky make no representation that actual results achieved will be the same in whole or in part as those set out in the forward-looking information. Furthermore, the forward-looking information contained in this news release is made as of the date of this news release. The purpose of the financial outlook in this news release is to provide management's expectations of the effects of the transaction. Except as required by applicable securities law, Cenovus and Husky undertake no obligation to update publicly or otherwise revise any forward-looking information or the foregoing list of factors affecting those statements, whether as a result of new information, future events or otherwise or the foregoing lists of factors affecting this information.
This cautionary statement qualifies all forward-looking information contained in this news release. The prospective financial information included in this news release has been prepared by, and is the responsibility of management of Cenovus and Husky.
Oil and Gas Information
The estimates of reserves of Cenovus were prepared effective
The estimates of reserves of Husky were prepared effective
Readers are cautioned that the term proved reserves life index may be misleading, particularly if used in isolation. This measure is used for consistency with other oil and gas companies and does not reflect the actual life of the reserves.
For additional information about the reserves of Cenovus and Husky and other oil and gas information, see “Reserves Data and Other Oil and Gas Information” and "Statement of Reserves Data and Other Oil and Gas Information" in Cenovus's and Husky's annual information forms for the year ending
The
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Cenovus Contacts | |
Investor Relations 403-766-7711 | Media Relations 403-766-7751 |
Husky Contacts | |
Investor Relations 403-513-7817 | Media Relations 403-298-7088 |
Source:
2020 GlobeNewswire, Inc., source