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Cenovus Energy Inc. is adding to its already hefty steam-driven oilsands holdings with a $5.7-billion cash-and-stock deal to buy Athabasca Oil Corp., and its chief executive says recent government policy shifts will help unlock production growth from the properties it’s acquiring.
Athabasca has 40,000 barrels per day of oilsands production currently, but Cenovus sees the opportunity to ratchet that up to 115,000 by 2032.
“That represents one of the most significant organic growth opportunities available in Canadian oilsands today,” CEO Jon McKenzie told a conference call with analysts Monday.
The deal comes days after the federal government deemed a proposed million-barrel-a-day pipeline from Alberta to British Columbia the first national interest project under legislation passed last year. The designation means the pipeline will be subject to a streamlined regulatory review through the Major Projects Office.
There have been questions over whether Cenovus and its oilsands peers would be willing to invest in enough production growth to fill that massive pipeline by the time it starts up around 2032, as well as several other pipeline expansions set to come online sooner.
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McKenzie said the federal and Alberta governments have taken “positive steps” toward boosting the sector’s competitiveness.
“These steps will have a meaningful impact on our ability to advance growth projects, like the ones we are contemplating at Leismer and Corner,” he said, referring to two Athabasca assets that will be added to its portfolio.
Last month, Prime Minister Mark Carney announced businesses will be able to immediately deduct the cost of a broader range of investments against their taxes than they had been previously. McKenzie said that move “is not immaterial” to its ability to speed up growth.
He also cited upcoming royalty incentives the Alberta government has said it expects to announce in November to spur more oilsands production.
“All of that fits together to draw capital back into the resource in the Athabasca Basin and probably accelerate growth as well,” McKenzie said.
Under the terms of the agreement, Athabasca shareholders will have the option to receive $12 in cash or 0.264 of a Cenovus common share for each share they hold, subject to limits on the total cash and shares available. The total cash available is capped at $4.3 billion, while the number of Cenovus shares available under the offer is limited to 44.4 million.
“While the transaction does not come cheap … we view the acquisition as strategically compelling given the scarcity value of top tier, long duration thermal inventory and the increasingly constructive backdrop for oilsands development,” wrote Desjardins Securities analyst Robert Mann in a note.
Michael Berger, senior analyst at Enverus Intelligence Research, wrote in a report that the Athabasca deal’s valuation lands well above that of earlier transactions.
“The higher price paid by Cenovus compared to historical deals reflects a rerating of Canadian oilsands producers higher as the industry’s critical position in providing long-term oil resource in a resource-constrained world grows sharper,” Berger said.
“Additionally, scarcity always demands a premium, and logical large scale oilsands acquisition targets have been significantly drawn down.”
Just under a year ago, Cenovus closed another multibillion-dollar acquisition of a smaller oilsands peer. After a bitter bidding war with Strathcona Resources Ltd., Cenovus bought MEG Energy for $8.6 billion.
“The majority of oilsands resource now sits in the hands of very large operators,” Berger wrote. Cenovus, ConocoPhillips, Canadian Natural Resources Ltd., Suncor Energy Inc. and Imperial Oil Ltd. are now dominant in the oilsands.
“The lack of targets going forward means a hot oilsands [mergers and acquisitions] market may be set to cool,” Berger said.
The deal brings Cenovus’ share of total oilsands output to 21.5 per cent, said a report by energy research firm Wood Mackenzie.
“This most recent acquisition marks the latest step in a decade-long consolidation of Canadian oilsands ownership into the hands of a small number of large-cap Canadian companies,” said Mark Oberstoetter, head of Americas upstream research for the firm.
“With this deal, 90 per cent of oilsands production remains in Canadian hands, and it is now more concentrated than ever among the largest players.”
Cenovus shares closed down three per cent at $44.86, while Athabasca’s were up 13.5 per cent at $12.01.
Cenovus says it expects to close the deal in December, subject to customary closing conditions, including regulatory and shareholder approvals.