Photographer: Brent Lewin/Bloomberg

Cenovus Sees Demand for Assets as It Seeks to Fund Conoco Deal

Cenovus Energy Inc. has seen strong interest in the assets it’s selling to help fund a C$17.7 billion ($13.3 billion) acquisition of ConocoPhillips’ oil-sands business.

“We’ve had multiple inbound inquiries from various sources –- private equity funds, pension plans, smaller companies -- letting us know that they’re interested in the assets,’’ Chief Executive Officer Brian Ferguson told reporters at the Canadian Association of Petroleum Producers Scotiabank Investment Symposium in Toronto on Tuesday.

The purchase of Conoco’s 50 percent stake in their oil-sands joint venture and most of its conventional assets in western Canada’s Deep Basin has been criticized by analysts for raising Cenovus’ risk profile and weakening its balance sheet. Cenovus is funding the cash portion by tapping a credit line, taking on a C$10.5 billion bridge financing and selling C$3 billion of shares at a discount to recent prices.

While the acquisition will double the Calgary-based producer’s reserves and production, it ties it heavily to one of the costliest methods of producing oil after prices sank below $30 a barrel last year. Cenovus also limited its potential gains from a crude-price recovery by agreeing to make contingent payments to Conoco over the next five years if the Western Canadian Select crude benchmark rise above a certain level.

The day after the deal was announced on March 29, Cenovus shares slid 14 percent, their biggest drop since the company began trading in 2009. The stock has fallen an additional 2.1 percent since.

That reaction contrasted with the 10 percent jump in shares of Canadian Natural Resources Ltd. just two weeks earlier, when it agreed to buy assets in Alberta from Royal Dutch Shell Plc and Marathon Oil Corp.

Bond Rally

The debt market took a more favorable view of the Cenovus deal, though, with the company’s widely traded 2039 bonds rising almost 3 cents on the dollar to 115.3 cents following the acquisition announcement. They have since pared some of the gains since Cenovus sold new debt to fund the deal. The bonds traded around 114.2 cents at 1:19 p.m. Tuesday in New York.

With about 440,000 barrels a day of capacity after the acquisitions, Cenovus will be the third-largest oil-sands producer by the end of the decade, behind Suncor Energy Inc. and Canadian Natural, according to company statements.

Yet the oil-sands industry faces challenges. In addition to higher costs and environmentalists’ objections, the region has been hampered by a dearth of options to move its crude to market. Proposed pipelines -- and renewed support in the U.S. for the Keystone XL project -- may help to ease a bottleneck that has kept Western Canadian oil prices below global benchmarks.

— With assistance by Allison McNeely

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