Highlights: job losses, low break-even costs, good fit between upstream and downstream assets of two companies, retain commitment to “ambition” of net-zero emissions by 2050
Cenovus Energy Inc. and Husky Energy Inc. are merging in an all stock deal valued at $23.6 billion, inclusive of debt, expected to close by the end of Q1 next year. The combined company, which will bear the Cenovus name, will be Canada’s third-largest oil and gas producer.
There’s more bad news for Canadian oil and gas workers, according to a press release. The combined Cenovus expects to save $600 million a year by cutting jobs, reducing corporate overhead costs, and lowering procurement costs through economies of scale.
Watch Energi Media‘s interview with Kevin Birn, IHS MarkIt oil sands director, explaining the benefits of the merger for both companies.
The combined company is expected to be free funds flow breakeven in 2021 at WTI prices of US$36 per barrel, with a line of sight to reducing its free funds flow breakeven to less than US$33 by 2023. This is lower than either company on a standalone basis.
The combined company will produce about 750,000 barrels of oil equivalent per day (BOE/d) of low-cost oil and natural gas production, including 50,000 BOE/d of high free funds flow generating offshore Asia Pacific production. It will be the second-largest Canadian-based refiner and upgrader, with total North American upgrading and refining capacity of approximately 660,000 barrels per day (b/d), which includes approximately 350,000 b/d of heavy oil conversion capacity. The integration of Cenovus’s upstream assets with Husky’s downstream and midstream portfolio will reduce condensate costs associated with heavy oil transportation.
The company will have access to about 265,000 b/d of current takeaway capacity out of Alberta on existing major pipelines, as well as about 305,000 b/d of committed capacity on planned pipelines. In addition, it will have 16 million barrels of crude oil storage capacity as well as strategic crude-by-rail assets that provide takeaway optionality.
Husky’s offshore Asia Pacific natural gas production interests currently generate approximately $1 billion in annual free funds flow through sales largely under long-term contracts.
The estimated proved reserves life of about 33 years, consisting mostly of very low-cost reserves, is expected to eliminate the need for future large-scale capital projects to sustain production at current levels.
The transaction will result in processing capacity and egress out of Alberta for the majority of the combined company’s oil sands and heavy oil production. The company will have opportunities for margin enhancement through strategically located upstream assets integrated with the upgrading complex at Lloydminster, Saskatchewan, large U.S. refining assets in the Midwest (PADD 2) Gulf Coast (PADD 3), and storage and blending operations at Hardisty, Alberta.
Immediate efficiencies are also expected to be realized by implementing best practices from each company, including applying Cenovus’s operating expertise to Husky’s oil sands assets, leveraging the increased portfolio’s scale in the Deep Basin, and pursuing commercial and contract-related efficiencies on midstream marketing and blending opportunities.
Alex Pourbaix will serve as the combined company’s CEO, Jeff Hart will serve as chief financial officer, Jon McKenzie will serve as the chief operating officer. Additional senior executives for the combined company will be selected from top talent at both companies and named by the close of the transaction. The management team will be complemented by a Board of Directors consisting of eight directors identified by Cenovus and four directors identified by Husky.
“We will be a leaner, stronger and more integrated company, exceptionally well-suited to weather the current environment and be a strong Canadian energy leader in the years ahead,” said Pourbaix.
“The integration of Cenovus’s best-in-class in situ oil sands assets with Husky’s extensive North American upgrading, refining and transportation network and high netback offshore natural gas production, will create a low-cost competitor and support long-term value creation,” said Rob Peabody, Husky president and CEO.
ESG (environment, social, governance)
Cenovus and Husky say they have made commitments to world-class safety performance and ESG leadership that will remain core to the combined company.
“The company will continue working to earn its position as a global energy supplier of choice by advancing clean technology and reducing emissions intensity,” the press release said. “This includes maintaining the ambition established by each company independently of achieving net zero emissions by 2050.”
Cenovus will also make it a priority to continue building upon the strong local community relationships already established by both companies, with a focus on Indigenous economic reconciliation.
The targets Cenovus and Husky released earlier this year for their key ESG focus areas are the products of robust processes to ensure alignment with the companies’ business plans and strategies. Cenovus remains committed to pursuing ESG targets and will undertake a similarly thorough analysis before setting meaningful targets for the new portfolio. Once that work is complete in 2021 and approved by the Board, the new targets and plans to achieve them will be disclosed.