Cenovus Energy Inc. is expanding its substantial steam-assisted oilsands portfolio through a $5.7-billion cash-and-stock agreement to acquire Athabasca Oil Corp. The company’s CEO has expressed optimism that recent governmental policy changes will facilitate enhanced production growth from the assets they are set to acquire.
Athabasca currently produces 40,000 barrels of oilsands per day, but Cenovus envisions increasing that figure to 115,000 by 2032.
“This represents one of the most significant organic growth opportunities in the Canadian oilsands sector today,” stated CEO Jon McKenzie during a conference call with analysts on Monday.
The announcement of the acquisition follows the federal government’s classification of a proposed million-barrel-per-day pipeline from Alberta to British Columbia as the first national interest project under new legislation enacted last year. This designation allows the pipeline to undergo a more efficient regulatory review process via the Major Projects Office.
Concerns have been raised regarding whether Cenovus and its oilsands counterparts would commit to sufficient production growth to fill that extensive pipeline by its anticipated operational date of around 2032. Several other pipeline expansions are expected to come online sooner.
Ottawa and Alberta are proceeding with the large Pacific Link pipeline project, yet private investors seem hesitant to fully commit. Companies are seeking evidence that regulatory reforms can expedite the completion of significant projects.
McKenzie remarked that both the federal and Alberta governments have taken “positive measures” aimed at enhancing the industry’s competitiveness.
“These initiatives will significantly influence our capability to move forward with growth projects, such as those we are considering at Leismer and Corner,” he mentioned, referring to two Athabasca assets that will join its portfolio.
Recently, Prime Minister Mark Carney revealed that businesses would now be able to immediately write off a wider array of investments against their taxes than previously allowed. McKenzie pointed out that this change “is not insignificant” in terms of facilitating quicker growth.
He also mentioned potential royalty incentives that the Alberta government is set to announce in November, aimed at stimulating further oilsands production.
“All these elements work together to attract capital back into the Athabasca Basin resource and likely accelerate growth,” McKenzie added.
According to the agreement, Athabasca shareholders can choose to receive either $12 in cash or 0.264 of a Cenovus common share for each share they own, with certain limits on the total cash and share availability. The cash portion is limited to $4.3 billion, while the number of Cenovus shares available in the offer is capped at 44.4 million.
“Although the transaction is not inexpensive, we consider the acquisition to be strategically attractive due to the rarity of top-tier, long-duration thermal resources and the increasingly favorable conditions for oilsands development,” noted Desjardins Securities analyst Robert Mann in a report.
Michael Berger, a senior analyst at Enverus Intelligence Research, stated in a report that the valuation of the Athabasca deal is significantly higher than previous transactions.
“The increased price offered by Cenovus compared to past deals indicates a reassessment of Canadian oilsands producers as the industry’s vital role in supplying long-term oil resources in a resource-limited landscape becomes more pronounced,” Berger explained.
“Moreover, scarcity tends to create demand for a premium, and viable large-scale oilsands acquisition targets have seen considerable depletion.”
Nearly a year ago, Cenovus finalized another multibillion-dollar purchase of a smaller oilsands competitor. Following a contentious bidding process with Strathcona Resources Ltd., Cenovus acquired MEG Energy for $8.6 billion.
“Most of the oilsands resources are now controlled by very large operators,” Berger noted. Cenovus, ConocoPhillips, Canadian Natural Resources Ltd., Suncor Energy Inc., and Imperial Oil Ltd. now dominate the oilsands sector.
“The limited availability of acquisition targets implies that the current fervor in the oilsands mergers and acquisitions market may be poised to cool,” Berger remarked.
This acquisition will elevate Cenovus’ total share of oilsands production to 21.5 percent, according to a report from energy research firm Wood Mackenzie.
“This latest acquisition signifies a continued trend over the past decade towards consolidating Canadian oilsands ownership within a few large-cap Canadian firms,” stated Mark Oberstoetter, who leads Americas upstream research for the firm.
“With this transaction, 90 percent of oilsands production remains under Canadian control and is now more concentrated than ever among the largest industry players.”
Cenovus shares decreased by three percent, closing at $44.86, while Athabasca shares rose by 13.5 percent to $12.01.
Cenovus anticipates completing the transaction in December, contingent upon standard closing conditions, including regulatory and shareholder approvals.