Cenovus Energy Inc. is expanding its substantial steam-driven oilsands portfolio with a cash-and-stock transaction valued at $5.7 billion to acquire Athabasca Oil Corp. The company’s CEO has indicated that recent shifts in government policies will facilitate production growth from the acquired assets.
Athabasca currently has a production capacity of 40,000 barrels of oilsands per day, but Cenovus anticipates increasing this figure to 115,000 by 2032.
“This represents one of the most significant organic growth opportunities in Canadian oilsands today,” stated CEO Jon McKenzie during a conference call with analysts on Monday.
The announcement follows a decision by the federal government to classify a proposed pipeline capable of transporting one million barrels per day from Alberta to British Columbia as the first national interest project under new legislation enacted last year. This classification allows for a more streamlined regulatory review through the Major Projects Office.
Concerns have been raised about whether Cenovus and its peers in the oilsands sector would invest sufficiently in production growth to utilize that large pipeline by its anticipated startup around 2032, along with several other pipeline expansions that are expected to come online sooner.
Ottawa and Alberta are advancing the enormous Pacific Link pipeline, but private investors seem hesitant to fully commit. Companies are seeking evidence that regulatory reforms can expedite major project completions.
McKenzie mentioned that both the federal and Alberta governments have taken “positive steps” to enhance the sector’s competitive edge.
“These measures will significantly impact our capability to progress with growth projects, such as those we are considering at Leismer and Corner,” he remarked, referencing two assets from Athabasca that will be incorporated into its portfolio.
Last month, Prime Minister Mark Carney revealed that businesses would be allowed to immediately deduct a wider array of investments against their taxes, a move McKenzie described as “not immaterial” to accelerating growth.
He also pointed to forthcoming royalty incentives that the Alberta government plans to unveil in November to encourage more oilsands production.
“All of these factors align to attract capital back into the resource in the Athabasca Basin and likely speed up growth,” McKenzie stated.
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, though there are limits on the total cash and stock available. The cash portion is limited to $4.3 billion, while the number of Cenovus shares offered is capped at 44.4 million.
“While this transaction is not inexpensive … we consider the acquisition strategically appealing given the rarity of top-tier, long-duration thermal inventory and the increasingly favorable conditions for oilsands development,” commented Robert Mann, an analyst at Desjardins Securities, in a note.
Michael Berger, a senior analyst at Enverus Intelligence Research, noted in a report that the valuation of the Athabasca deal is significantly higher than past transactions.
“The elevated price Cenovus is paying compared to historical deals signals a reevaluation of Canadian oilsands producers as the industry’s crucial role in securing long-term oil resources in a resource-scarce world becomes increasingly clear,” Berger explained.
“Furthermore, scarcity inherently commands a premium, and logical large-scale oilsands acquisition targets have been considerably depleted.”
Nearly a year ago, Cenovus finalized another multibillion-dollar acquisition of a smaller oilsands competitor. Following a fierce bidding conflict with Strathcona Resources Ltd., Cenovus acquired MEG Energy for $8.6 billion.
Berger noted that “the majority of oilsands resources are now controlled by very large operators,” which include Cenovus, ConocoPhillips, Canadian Natural Resources Ltd., Suncor Energy Inc., and Imperial Oil Ltd.
“The scarcity of targets moving forward suggests that the active oilsands [mergers and acquisitions] market may be poised to cool,” he added.
This acquisition will increase Cenovus’ share of total oilsands production to 21.5 percent, according to a report from energy research firm Wood Mackenzie.
“This latest acquisition represents another phase in the decade-long consolidation of Canadian oilsands ownership into the hands of a select few large-cap Canadian firms,” remarked Mark Oberstoetter, head of Americas upstream research at the firm.
“With this agreement, 90 percent of oilsands production remains under Canadian control, and it has become more concentrated among the largest players than ever before.”
Cenovus shares fell three percent to close at $44.86, while Athabasca shares rose 13.5 percent to $12.01.
The company anticipates finalizing the deal in December, pending standard closing conditions, including regulatory and shareholder approvals.