Cenovus Sells Royalty Unit to Ontario Fund for $2.6 Billion

Updated on

Cenovus Energy Inc. agreed to sell royalty lands to Ontario Teachers’ Pension Plan for about C$3.3 billion ($2.6 billion) in cash as Canada’s fourth-largest oil producer seeks funding sources after the drop in crude prices.

Heritage Royalty Ltd. Partnership holds about 4.8 million acres of royalty and mineral fee title lands in Alberta, Saskatchewan and Manitoba, Cenovus said Tuesday in a statement. Royalty lands generate revenue from drilling by other companies.

“The proceeds from this sale will strengthen our balance sheet and provide us with greater resilience during these uncertain times as well as the flexibility to invest in organic projects with strong returns,” Chief Executive Officer Brian Ferguson said in the statement.

The sale comes after the dramatic drop in oil prices that started last year. The Calgary-based company has sold shares, eliminated jobs and cut spending as it seeks to weather the slump. The company was also considering an initial public offering of the royalty lands unit.

Cenovus probably went for a sale as opposed to an IPO because there are fewer fees involved and they could get a better price from the pension fund, said Michael Ruggirello, a Toronto-based analyst for Accountability Research Corp.

Cenovus climbed 0.9 percent to C$19.97 at the close in Toronto. The stock has dropped 17 percent this year.

Encana Corp. separated its royalty lands unit last year, raising C$4.06 billion in an initial public offering and subsequent sale of shares in PrairieSky Royalty Ltd. Canadian Natural Resources Ltd. is considering selling or spinning off its royalty lands.

Sales End?

The Cenovus unit produced the equivalent of about 7,800 barrels of oil a day during the first quarter. The acreage is bigger than analysts had been expecting and it includes added royalties, including from the Pelican Lake project.

The company confirmed it was in talks with the pension plan earlier this month. The company expects the deal to close by the end of July.

“This is a favorable transaction overall,” said Garey Aitken, chief investment officer at Franklin Bissett Investment Management in Calgary, which manages about C$23 billion including Cenovus shares. “We’ve seen the last of the major asset divestitures from Cenovus.”

(Updates with comment from investor in last paragraph.)
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