Cenovus Energy Inc. (TSX: CVE) (NYSE: CVE) and Husky Energy Inc.
(TSX: HSE) today announced a transaction to create a new integrated
Canadian oil and natural gas company with an advantaged upstream
and downstream portfolio that is expected to provide enhanced free
funds flow generation and superior return opportunities for
investors.
The companies have entered into a definitive arrangement
agreement under which Cenovus and Husky will combine in an
all-stock transaction valued at $23.6 billion, inclusive of debt.
The combined company will operate as Cenovus Energy Inc. and remain
headquartered in Calgary, Alberta. The transaction has been
unanimously approved by the Boards of Directors of Cenovus and
Husky and is expected to close in the first quarter of 2021.
Transaction highlights:
- Accretive to all shareholders on cash flow and free funds flow
per share
- Anticipated annual run rate synergies of $1.2 billion, largely
achieved within the first year, independent of commodity
prices
- Expected free funds flow break-even at West Texas Intermediate
(WTI) pricing of US$36 per barrel (bbl) in 2021, and at less than
WTI US$33/bbl by 2023
- Low exposure to Western Canadian Select (WCS) locational
differential risk while maintaining healthy exposure to global
commodity prices
- Increased and more stable cash flows support investment grade
credit profile
- Net-debt-to-adjusted-EBITDA ratio of less than 2x expected to
be achieved in 2022
- Anticipated quarterly dividend of $0.0175 per share (upon Board
approval) and positioned for consistent growth
- Husky shareholders will receive 0.7845 of a Cenovus share plus
0.0651 of a Cenovus share purchase warrant in exchange for each
Husky common share
An Integrated Oil and Natural Gas Leader – Key
Facts |
|
Standalone Cenovus1 |
Standalone Husky1 |
Pro forma company1 |
Production (BOE/d) |
~475,000 |
~275,000 |
~750,000 |
Upgrading & refining capacity (BOE/d) |
~250,000 |
~410,000 |
~660,000 |
2P reserves (mmBOE) |
~7,000 |
~2,000 |
~9,000 |
Takeaway capacity from Alberta (bbls/d)
Current pipelines Planned
pipelines/expansions |
~135,000 ~275,000 |
~130,000 ~30,000 |
~265,000 ~305,000 |
Crude oil storage (mmbbls) |
~10 |
~6 |
~16 |
Sustaining capital ($billion per year) |
1.2 |
1.8 |
2.4 |
Commitment to ESG leadership |
Ambition to achieve net zero emissions by 2050; specific ESG
targets and plan to be announced post close |
1 Based on year-to-date production.
Highly Complementary Integrated
Portfolio
The combination has low exposure to Alberta oil pricing while
maintaining healthy exposure to global commodity prices. It will
unlock market opportunities by uniting high-quality and low-cost
oil sands and heavy oil assets with extensive midstream and
downstream infrastructure, creating a global competitor able to
optimize margin capture across the heavy oil value chain.
“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 Alex
Pourbaix, Cenovus President and Chief Executive Officer. “The
diverse portfolio will enable us to deliver stable cash flow
through price cycles, while focusing capital on the highest-return
assets and opportunities. The combined company will also have an
efficient cost structure and ample liquidity. All of this supports
strong credit metrics, accelerated deleveraging and an enhanced
ability for return of capital to shareholders.”
The combined company will be the third largest Canadian oil and
natural gas producer, based on total company production, with 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 (bbls/d), which includes approximately
350,000 bbls/d of heavy oil conversion capacity. The company will
have access to about 265,000 bbls/d of current takeaway capacity
out of Alberta on existing major pipelines, as well as about
305,000 bbls/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.
Rob Peabody, Husky President and Chief Executive Officer, said,
“Bringing our talented people and complementary assets together
will enable us to deliver the full potential of this resilient new
company. 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.”
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 PADD 2 and PADD 3, and
storage and blending operations at Hardisty, Alberta. The
integration of Cenovus’s upstream assets with Husky’s downstream
and midstream portfolio will also shorten the future value chain
and reduce condensate costs associated with heavy oil
transportation. Cash flow stability is further underpinned by the
global exposure of Husky’s offshore Asia Pacific natural gas
production interests, which currently generate approximately $1
billion in annual free funds flow through sales largely under
long-term contracts.
Strategic and Financial Benefits of the
Combination
Cenovus and Husky combined are expected to be stronger, more
competitive, efficient and profitable than either company on its
own.
Immediate and tangible savings and improved
capital allocation opportunities
The combined company is expected to generate an incremental $1.2
billion of annual free funds flow, comprised of $600 million in
annual corporate and operating synergies and $600 million in annual
capital allocation synergies, achievable independent of commodity
prices. These synergies are the product of a rigorous and
disciplined evaluation process conducted by Cenovus and Husky over
the past months to identify the specific efficiencies that can be
gained through this transaction. The vast majority of the annual
savings are anticipated to be achieved in the first year of
combined operations, with the full amount of the annual run rate
synergies realized within year two. The companies anticipate
additional future savings based on opportunities for further
physical integration of the upstream and downstream heavy oil
assets.
The anticipated $600 million in annual corporate and operating
cost synergies will be achieved through reductions to combined
workforce and corporate overhead costs including streamlined IT
systems and procurement savings through economies of scale.
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.
The expanded portfolio will enable more efficient,
returns-focused capital allocation. The company is expected to
sustain production levels and downstream operations with an
anticipated annual capital investment of $2.4 billion, a reduction
of more than $600 million per year compared with what would be
required by the two companies on a standalone basis. The estimated
proved reserves life of about 33 years, consisting mostly of very
low-cost reserves, is expected to result in reduced re-investment
risk and eliminate the need for future large-scale capital projects
to sustain production at current levels.
Enhanced free funds flow generation and
investment grade metrics
The combined company is expected to be free funds flow breakeven
in 2021 at WTI prices of US$36/bbl, with a line of sight to
reducing its free funds flow breakeven to less than WTI US$33/bbl
by 2023. This is lower than either company on a standalone
basis.
The company’s priority will be to maximize free funds flow by
focusing investments on sustaining capital expenditures. In the
current environment, free funds flow generation will position the
combined company to achieve a net-debt-to-adjusted-EBITDA target of
less than 2x in 2022, without the need for asset dispositions.
Along with the combined entity’s lower free funds flow breakeven
threshold, the combined company will offer an accelerated
deleveraging capability relative to either company on a standalone
basis.
The funds flow profile of the combined company supports
investment grade credit metrics and a lower cost of capital through
the commodity price cycle. At closing, the combined company is
expected to have ample liquidity with $8.5 billion in undrawn
committed credit facilities and no bond maturities until 2022.
After achieving its balance sheet objectives, the company
expects to generate sufficient free funds flow to be able to
consider sustainable growth in shareholder distributions and a
returns-focused organic capital investment program with residual
free funds flow. Following the close of the transaction, Cenovus is
anticipating the Board’s approval of a quarterly dividend of
$0.0175 per share.
Uncompromising Commitment to Safety and
Sustainability Leadership
The commitments both Cenovus and Husky have made to world-class
safety performance and environmental, social and governance (ESG)
leadership will remain core to the combined company. This includes
ambitious ESG targets, robust management systems and transparent
performance reporting. The company will continue working to earn
its position as a global energy supplier of choice by advancing
clean technology and reducing emissions intensity. 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. Leading safety practices, strong governance
and advancing diversity and inclusion will remain central to the
company’s ESG commitments.
Management and Board Leadership – Committed to
Successful Integration
The combined company will be led by a proven management team
reflecting the strengths of both organizations, with a track record
of strong safety performance, operational excellence and cost and
capital discipline, along with downstream and midstream expertise.
Alex Pourbaix will serve as Chief Executive Officer of the combined
company, Jeff Hart will serve as Chief Financial Officer, Jon
McKenzie will serve as the Chief Operating Officer and Keith
MacPhail will serve as independent Board Chair.
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.
Transaction Details and
Governance
Under the terms of the definitive agreement, Husky shareholders
will receive 0.7845 of a Cenovus share plus 0.0651 of a Cenovus
share purchase warrant in exchange for each Husky common share.
This represents a 21% premium, excluding warrants, relative to
Husky’s five-day volume-weighted average price per share as at
October 23, 2020. Including the warrants, the premium is 23%. While
the transaction was originally conceived as an at-market merger,
resulting in a negotiated proportionate ownership level, the
respective share values have diverged during the due diligence
period over the past months. This resulted in a premium for Husky
shareholders based on the current share prices.
Each whole warrant will entitle the holder to acquire one
Cenovus common share for a period of five years following the
completion of the transaction at an exercise price of $6.54 per
share. Assuming the full exercise of such warrants, the combined
company would receive approximately $428 million in cash proceeds.
The aggregate consideration package for Husky shareholders implies
a transaction equity value for Husky of approximately $3.8 billion,
and a transaction enterprise value for Husky of approximately $10.2
billion.
The transaction is structured through a plan of arrangement in
respect of the securities of Husky under the Business Corporations
Act (Alberta), and is subject to the approval of at least
two-thirds of the votes cast by holders of Husky common shares.
Hutchison Whampoa Europe Investments S.à r.l., which holds 40.19%
of the Husky common shares and L.F. Investments S.à r.l.,
which holds 29.32% of the Husky common shares, have each
entered into a separate irrevocable voting support agreement with
Cenovus pursuant to which each has committed to vote all of its
Husky common shares, representing, in total, approximately 70% of
the Husky common shares, in favour of the transaction at the
special meeting of Husky shareholders. In addition, Husky will also
seek the approval of at least two-thirds of the votes cast by
holders of outstanding Husky preferred shares voting together as a
single class. If Husky preferred shareholder approval is obtained,
each Husky preferred share will be exchanged for one Cenovus
preferred share with substantially the same commercial terms and
conditions as the Husky preferred shares. The transaction is not
conditional on Husky preferred shareholder approval and, if not
obtained, the Husky preferred shares will remain outstanding in a
subsidiary of the combined company.
The issuance of Cenovus common shares, warrants exercisable for
Cenovus common shares and, if applicable, Cenovus preferred shares
pursuant to the transaction is subject to the approval by a
majority of the votes cast by holders of Cenovus common shares at a
special meeting of Cenovus shareholders.
Immediately following the close of the transaction, and prior to
the exercise of any warrants issued to Husky shareholders as part
of this transaction, Cenovus shareholders will own approximately
61% of the combined company, and Husky shareholders will own
approximately 39%. Immediately following the close of the
transaction, Hutchison Whampoa Europe Investments S.à r.l. and
L.F. Investments S.à r.l. will respectively hold approximately
15.7% and 11.5% of the combined company.
“Cenovus is pleased to have Husky’s significant shareholders,
with their strong ties to Canada, exceptional business capabilities
and knowledge of Asia and Husky’s Asian assets in particular,
become one of our long-term shareholders,” said Pourbaix. “We value
the perspectives they will provide as highly successful
international investors.”
In addition to the voting support agreements, Hutchison Whampoa
Europe Investments S.à r.l. and L.F. Investments S.à r.l. have
also each entered into a separate standstill agreement with
Cenovus, taking effect at closing, under which they will each be
subject to certain voting requirements, transfer restrictions and
other standstill restrictions for a maximum term of five years
following completion of the transaction. All other shareholders
holding 5% or more of the combined company at closing of the
transaction that do not have existing similar rights, will also be
provided with customary registration and pre-emptive rights upon
request.
The Board of Directors of each of Cenovus and Husky have
unanimously approved the arrangement agreement and support the
transaction. Details of the transaction will be included in a joint
information circular that Cenovus and Husky expect to mail to their
respective shareholders by mid-November. The special shareholder
meetings of both companies are expected to be held in December.
In addition to shareholder approvals, the transaction is subject
to regulatory approvals, as well as the approval of the Court of
Queen’s Bench of Alberta.
The transaction is expected to close in the first quarter of
2021.
Further details regarding this strategic transaction will
be available on Cenovus’s and Husky’s SEDAR profiles at sedar.com
and on Cenovus’s website at cenovus.com and Husky’s website at
huskyenergy.com.
Any questions or requests for further information regarding the
plan of arrangement and the special meetings to be held to consider
the proposed transaction should be directed to Kingsdale Advisors
by telephone, toll-free in North America at 866-851-4179 or at
416-867-2272 outside of North America, or e-mail at
contactus@kingsdaleadvisors.com.
Advisors
RBC Capital Markets and TD Securities are acting as financial
advisors to Cenovus, and have each provided a verbal opinion to the
Board of Directors of Cenovus that the consideration to be paid by
Cenovus under the arrangement agreement is fair, from a financial
point of view, to Cenovus subject to the assumptions made and
limitations and qualifications included in the written opinion of
each financial advisor. Bennett Jones LLP and Paul, Weiss, Rifkind,
Wharton & Garrison LLP are acting as Cenovus’s legal
advisors.
Goldman Sachs Canada and CIBC Capital Markets are acting as
financial advisors to Husky. Osler, Hoskin & Harcourt LLP and
Norton Rose Fulbright US LLP are Husky’s legal advisors.
Hutchison Whampoa Europe Investments S.à r.l.’s legal advisors
are Stikeman Elliott LLP and Skadden Arps Slate Meagher & Flom
LLP. L.F. Investments S.à r.l.’s legal advisor is Marvin
Yontef, Esq.
Conference Call Today
11 a.m. Mountain Time (1 p.m. Eastern
Time) |
The companies will host a joint conference call and webcast today,
Sunday, October 25, 2020, starting at 11:00 a.m. MT (1:00 p.m. ET)
to discuss the transaction. To participate, please dial
833-529-0230 (toll-free in North America) or 236-389-2157
approximately 10 minutes prior to the conference call. A live audio
webcast of the conference call will also be available via
cenovus.com and huskyenergy.com. The webcast will be archived for
approximately 90 days. Media will join in listen only
mode. |
Advisory
Basis of Presentation
All financial figures and information have been prepared in
Canadian dollars (which includes references to "dollars" and "$"),
except where another currency has been indicated, and in accordance
with International Financial Reporting Standards ("IFRS" or "GAAP")
as issued by the International Accounting Standards Board.
Production volumes are presented on a before royalties basis.
Non-GAAP Measures
Certain financial measures in this news release do not have a
standardized meaning as prescribed by IFRS, such as adjusted
EBITDA, adjusted free funds flow, free funds flow, net debt and
netback, and therefore are considered non-GAAP measures. These
measures may not be comparable to similar measures presented by
other issuers. These measures have been described and presented in
order to provide shareholders, potential investors and analysts
with additional measures for analyzing the transaction. This
additional information should not be considered in isolation or as
a substitute for measures prepared in accordance with IFRS.
Adjusted EBITDA is a non-GAAP measure defined as net earnings
before finance costs, interest income, income tax expense,
depreciation, depletion and amortization, exploration &
evaluation write-down, goodwill impairments, asset impairments and
reversals, unrealized gains (losses) on risk management, foreign
exchange gains (losses), revaluation gain, re-measurement of
contingent payment, gains (losses) on divestiture of assets, and
other income (loss), net, calculated on a trailing 12-month
basis.
Net-debt is a non-GAAP measure defined as short-term borrowings,
and the current and long-term portions of long-term debt, net of
cash and cash equivalents and short-term investments. Free funds
flow is a non-GAAP measure defined as adjusted funds flow less
capital investment.
Adjusted funds flow is a non-GAAP measure commonly used in the
oil and gas industry to assist in measuring a company’s ability to
finance its capital programs and meet its financial obligations.
Adjusted funds flow is defined as cash from (used in) operating
activities excluding net change in other assets and liabilities and
net change in non-cash working capital. Non-cash working capital is
composed of accounts receivable, inventories (excluding non-cash
inventory write-downs and reversals), income tax receivable,
accounts payable and income tax payable. Net change in other assets
and liabilities is composed of site restoration costs and pension
funding.
Netback is a non-GAAP measure commonly used in the oil and gas
industry to assist in measuring operating performance on a per-unit
basis. Cenovus's and Husky's netback calculation is aligned with
the definition found in the Canadian Oil and Gas Evaluation
Handbook (“COGE Handbook”). Netbacks reflect the margin of Cenovus
on a per-barrel of oil equivalent basis. Netback is defined as
gross sales less royalties, transportation and blending, operating
expenses and production and mineral taxes divided by sales volumes.
Netbacks do not reflect non-cash write-downs or reversals of
product inventory until it is realized when the product is sold.
The sales price, transportation and blending costs, and sales
volumes exclude the impact of purchased condensate. Condensate is
blended with the heavy oil to transport it to market.
Barrels of Oil EquivalentNatural gas volumes
have been converted to barrels of oil equivalent ("BOE") on the
basis of six Mcf to one barrel ("bbl"). BOE may be misleading,
particularly if used in isolation. A conversion ratio of one bbl to
six Mcf is based on an energy equivalency conversion method
primarily applicable at the burner tip and does not represent value
equivalency at the wellhead. Given that the value ratio based on
the current price of crude oil compared with natural gas is
significantly different from the energy equivalency conversion
ratio of 6:1, utilizing a conversion on a 6:1 basis is not an
accurate reflection of value.
Note Regarding Forward-Looking
Information
This news release contains certain forward-looking statements
and forward-looking information (collectively referred to as
"forward-looking information") within the meaning of applicable
securities legislation, including the U.S. Private Securities
Litigation Reform Act of 1995, about Cenovus's and Husky's current
expectations, estimates and projections about the future, based on
certain assumptions made in light of experiences and perceptions of
historical trends. Although Cenovus and Husky believe that the
expectations represented by such forward-looking information are
reasonable, there can be no assurance that such expectations will
prove to be correct.
This forward-looking information is identified by words such as
“achieve”, “aim”, “ambition”, “anticipate”, “believe”, “can be”,
“capacity”, “committed”, “commitment”, “continue”, “could”,
“drive”, “enhance”, “ensure”, “estimate”, “expect”, “focus”,
“forecast”, “forward”, “future”, “guidance”, “maintain”, “may”,
“objective”, “opportunity”, “outlook”, “plan”, “position”,
“potential”, “priority”, “re-establishing”, “strategy”, “should”,
“target”, “will”, or similar expressions and includes suggestions
of future outcomes, including statements about: the timing and
completion of the plan of arrangement and the acquisition of all
issued and outstanding Husky common shares and Husky preferred
shares, if applicable; the timing and anticipated receipt of
required regulatory, court and securityholder approvals for the
transaction and other customary closing conditions; Cenovus's
ability to issue securities pursuant to the transaction; the
anticipated benefits of the transaction, including corporate,
operational and other synergies and the timing thereof; the ability
to integrate the businesses of Cenovus and Husky, anticipated
margins and reductions to free funds flow break-even at WTI,
excluding one-time transaction related costs; expected free funds
flow; planned capital allocation and capital investment program;
anticipated savings and the sustainability and timing thereof; the
expected exposure to WCS oil prices, Alberta and global commodity
prices and anticipated sensitivity to commodity price fluctuations;
the expected management team and their qualifications; the
anticipated effect of the transaction on the competitiveness of the
combined company and its profitability, liquidity and cost
structure; anticipated free funds flow generation and stability;
expectations of the combined company's deleveraging capability; the
anticipated reserves of the combined company; the expected credit
profile and credit ratings of the combined company; expectations of
the combined company's ability to pay dividends, subject to board
approval, and any increases thereto; the combined company's
takeaway optionality; the anticipated safety and reliability of the
operations of the combined company; the relative size of the
combined company; the expected benefits of the midstream gathering,
upgrading, refining and transportation network and assets,
including high netback international offshore natural gas assets,
and associated agreements to be acquired and assumed by Cenovus and
the quality and efficiencies thereof; anticipated need for large
scale capital projects and asset sales; expected pro forma
financial and operational projections for 2021 and future years and
plans and strategies to realize such projections; the expected
development and growth of the combined company's business and plans
and strategies to realize such expectations; the combined company's
net-debt-to-adjusted-EBITDA ratio; the combined company's credit
facilities and draws thereon, excluding letters of credit; the
planned commitments to clean technology, emission intensity
reductions, Indigenous engagement, environmental stewardship and
diversity; expectations of future production and the timing,
stability and growth thereof; anticipated transportation,
processing and refining capacities; anticipated priorities for 2020
and future years; anticipated market access; the expected ability
to implement the necessary operating expertise; the composition of
the combined company's board of directors and management following
closing of the transaction; and the projected shareholder returns.
Readers are cautioned not to place undue reliance on
forward-looking information as the combined company's actual
results may differ materially from those expressed or implied.
Developing forward-looking information involves reliance on a
number of assumptions and consideration of certain risks and
uncertainties, some of which are specific to Cenovus, Husky and the
combined company and others that apply to the industry generally.
The factors or assumptions on which the forward-looking information
is based include, but are not limited to: the satisfaction of the
conditions to closing of the transaction in a timely manner and
complete the arrangement on the expected terms; accretive to
shareholders in the first year of the combination excluding
one-time costs of the transaction; the combined company's ability
to successfully integrate the businesses of Cenovus and Husky;
access to sufficient capital to pursue any development plans
associated with full ownership of Husky; the combined company's
ability to issue securities; the impacts the transaction may have
on the current credit ratings of Cenovus and Husky and the credit
rating of the combined company following closing; forecast
commodity prices, light-heavy crude oil price differentials and
other assumptions identified in the 2020 guidance of Cenovus; the
potential further ramp down for forecast production volumes based
on business and market conditions; projected capital investment
levels, the flexibility of capital spending plans and associated
sources of funding; achievement of further cost reductions and
sustainability thereof; applicable royalty regimes, including
expected royalty rates; future improvements in availability of
product transportation capacity; the ability of underlying pricing
fundamentals to support the continuation of crude-by-rail programs;
changes in transportation costs following suspension of
crude-by-rail programs; increases to the combined company's share
price and market capitalization over the long term; opportunity for
the combined company to pay dividends, and the approval and
declaration of such dividends by the board of the combined company;
opportunities to repurchase shares for cancellation at prices
acceptable to the combined company; cash flows, cash balances on
hand and access to credit and demand facilities being sufficient to
fund capital investments; foreign exchange rate, including with
respect to the combined company's US$ debt and refining capital and
operating expenses; realization of expected capacity to store
within oil sands reservoirs barrels not yet produced, including
that the combined company will be able to time production and sales
of its inventory at later dates when demand has increased, pipeline
and/or storage capacity has improved and crude oil differentials
have narrowed; the Government of Alberta’s mandatory production
curtailment continuing to narrow the differential between WTI and
WCS crude oil prices thereby positively impacting cash flows for
the combined company; the WTI-WCS differential in Alberta remaining
largely tied to the extent to which voluntary economically driven
supply cuts are made, the potential start-up of the Enbridge Inc.’s
Line 3 Replacement Program, the completion of Trans Mountain
Expansion and Keystone XL projects, and the level of crude-by-rail
activity; the ability of the combined company's refining capacity,
dynamic storage, existing pipeline commitments and financial hedge
transactions to partially mitigate a portion of the combined
company's WCS crude oil volumes against wider differentials;
estimates of quantities of oil, bitumen, natural gas and liquids
from properties and other sources not currently classified as
proved; accounting estimates and judgments; future use and
development of technology and associated expected future results;
the combined company's ability to obtain necessary regulatory and
partner approvals; the successful and timely implementation of
capital projects or stages thereof; the ability to generate
sufficient cash flow to meet current and future obligations;
estimated abandonment and reclamation costs, including associated
levies and regulations applicable thereto; the combined company’s
ability to reach net zero emissions by 2050; the combined company's
ability to obtain and retain qualified staff and equipment in a
timely and cost-efficient manner; the combined company's ability to
carry out transactions on the desired terms and within the expected
timelines; forecast inflation and other assumptions inherent in the
current guidance of Cenovus and Husky; expected impacts of the
contingent payment to ConocoPhillips; alignment of realized WCS and
WCS prices used to calculate the contingent payment to
ConocoPhillips; the combined company's ability to access and
implement all technology necessary to efficiently and effectively
operate its assets; and other risks and uncertainties described
from time to time in the filings made by Cenovus and Husky with
securities regulatory authorities.
The forward-looking information in this news release also
includes financial outlooks and other forward-looking metrics
(including production, financial and oil and gas related metrics)
relating to Cenovus, Husky, the combined company and the
transaction, including: the expectations of Cenovus and Husky
regarding the impact of the transaction on free funds flow, funds
flow breakeven at WTI, net-debt-to-adjusted-EBITDA, deleveraging
capability, the projected capital expenditures of the combined
company, sustaining capital, undrawn committed credit facilities,
general and administrative costs, expenses per BOE and operating
costs.
Our forecast for the combined company reaching a
net-debt-to-adjusted-EBITDA ratio of less than 2x in 2022 is based
on August 20, 2020 forward strip commodity pricing, set out in the
below table:
Year |
WTI |
WTI-WCS differential |
Chicago 3-2-1 Crack |
CAD/USD exchange rate |
2021 |
US$45.00 |
US$14.75/bbl |
US$10.15/bbl |
0.75 CAD/USD |
2022 |
US$46.00 |
US$15.00/bbl |
US$11.50/bbl |
0.75 CAD/USD |
2023 |
US$47.00 |
US$13.50/bbl |
US$13.50/bbl |
0.75 CAD/USD |
The risk factors and uncertainties that could cause actual
results to differ materially from the anticipated results or
expectations expressed in this press release, include: the
completion and the timing of the transaction; the ability of
Cenovus and Husky to receive, in a timely manner, the necessary
regulatory, court, securityholder, stock exchange and other
third-party approvals; the ability of Cenovus and Husky to satisfy,
in a timely manner, the other conditions to the closing of the
transaction; interloper risk; the ability to complete the
transaction on the terms contemplated by the arrangement agreement
between Cenovus and Husky, and other agreements, including the
support agreements or at all; the ability of the combined company
to realize the anticipated benefits of, and synergies from, the
transaction and the timing thereof; failure to achieve and sustain
future cost reductions; the timing of the commencement and
completion of construction activities, first production and sales,
if at all; the impacts of a changing risk profile and possible
subjection to a credit rating review, which may result in a
downgrade or negative outlook being assigned to the combined
company; the ability of the combined company to pay dividends and
the approval and declaration of such dividends by the board of the
combined company; the potential exposure to political, economic or
social instability related to Husky's international operations; the
consequences of not completing the transaction, including the
volatility of the share prices of Cenovus and Husky, negative
reactions from the investment community and the required payment of
certain costs related to the transaction; actions taken by
government entities or others seeking to prevent or alter the terms
of the transaction; potential undisclosed liabilities unidentified
during the due diligence process; the accuracy of the pro forma
financial information of the combined company after the
transaction; the interpretation of the transaction by tax
authorities; the success of business integration; the focus of
management's time and attention on the transaction and other
disruptions arising from the transaction; the ability to access or
implement some or all of the technology necessary to efficiently
and effectively operate the assets and achieve expected future
results; volatility of and other assumptions regarding commodity
prices; the duration of the market downturn; a resurgence in cases
of COVID-19, which has occurred in certain locations and the
possibility of which in other locations remains high and creates
ongoing uncertainty that could result in restrictions to contain
the virus being re-imposed or imposed on a more strict basis,
including restrictions on movement and businesses; the extent to
which COVID-19 impacts the global economy and harms commodity
prices; the extent to which COVID-19 and fluctuations in commodity
prices associated with COVID-19 impacts the business, results of
operations and financial condition, all of which will depend on
future developments that are highly uncertain and difficult to
predict, including, but not limited to the duration and spread of
the pandemic, its severity, the actions taken to contain COVID-19
or treat its impact and how quickly economic activity normalizes;
the success of new COVID-19 workplace policies and the ability of
people to return to workplaces; continued liquidity being
sufficient to sustain operations through a prolonged market
downturn; WTI-WCS differential in Alberta does not remain largely
tied to the extent to which voluntary economically driven supply
cuts are made, the potential start-up of Enbridge Inc.’s Line 3
Replacement Program, the completion of the Trans Mountain Expansion
and Keystone XL projects, and the level of crude-by-rail activity;
the ability to achieve lower transportation costs as a result of
temporarily suspending the crude-by-rail program; the ability to
realize the expected impacts of the capacity to store within oil
sands reservoirs barrels not yet produced, including possible
inability to time production and sales at later dates when pipeline
and/or storage capacity and crude oil differentials have improved;
failure of the Government of Alberta’s mandatory production
curtailment to cause the differential between the WTI and the WCS
crude oil prices to narrow or to narrow sufficiently to positively
impact cash flows; unexpected consequences related to the
Government of Alberta’s mandatory production curtailment; the
effectiveness of risk management programs, including the impact of
derivative financial instruments, the success of hedging strategies
and the sufficiency of liquidity positions; the accuracy of cost
estimates regarding commodity prices, currency and interest rates;
lack of alignment of realized WCS prices and WCS prices used to
calculate Cenovus's contingent payment to ConocoPhillips; product
supply and demand; accuracy of share price and market
capitalization assumptions; market competition, including from
alternative energy sources; risks inherent in marketing operations,
including credit risks, exposure to counterparties and partners,
including ability and willingness of such parties to satisfy
contractual obligations in a timely manner; risks inherent in the
operation of a crude-by-rail terminal, including health, safety and
environmental risks; the ability to maintain desirable ratios of
net-debt-to-adjusted-EBITDA as well as net debt to capitalization;
the ability to access various sources of debt and equity capital,
generally, and on acceptable terms; the ability to finance growth
and sustaining capital expenditures; changes in credit ratings
applicable to the parties or any of their securities; changes to
dividend plans; the ability to utilize tax losses in the future;
accuracy of reserves, future production and future net revenue
estimates; accuracy of accounting estimates and judgements; the
ability to replace and expand oil and gas reserves; potential
requirements under applicable accounting standards for impairment
or reversal of estimated recoverable amounts of some or all of
assets or goodwill from time to time; the ability to maintain
relationships with partners and to successfully manage and operate
integrated businesses; reliability of assets including in order to
meet production targets; potential disruption or unexpected
technical difficulties in developing new products and manufacturing
processes; the occurrence of unexpected events such as fires,
severe weather conditions, explosions, blow-outs, equipment
failures, transportation incidents and other accidents or similar
events; refining and marketing margins; cost escalations, including
inflationary pressures on operating costs, including labour,
materials, natural gas and other energy sources used in oil sands
processes and increased insurance deductibles or premiums;
potential failure of products to achieve or maintain acceptance in
the market; risks associated with fossil fuel industry reputation
and litigation related thereto; unexpected cost increases or
technical difficulties in constructing or modifying manufacturing
or refining facilities; unexpected difficulties in producing,
transporting or refining of bitumen and/or crude oil into petroleum
and chemical products; risks associated with technology and
equipment, including potential cyberattacks; risks associated with
climate change and assumptions relating thereto; the combined
company’s ability to reach net zero emissions by 2050; the timing
and the costs of well and pipeline construction; the ability to
secure adequate and cost effective product transportation including
sufficient pipeline, crude-by-rail, marine or alternate
transportation, including to address any gaps caused by constraints
in the pipeline system or storage capacity; availability of, and
the ability to attract and retain, critical talent; possible
failure to obtain and retain qualified staff and equipment in a
timely and cost efficient manner; changes in labour relationships;
changes in the regulatory framework in any of the locations in
which Cenovus or Husky operate, including changes to the regulatory
approval process and land-use designations, royalty, tax,
environmental, greenhouse gas, carbon, climate change and other
laws or regulations, or changes to the interpretation of such laws
and regulations, as adopted or proposed, the impact thereof and the
costs associated with compliance; the expected impact and timing of
various accounting pronouncements, rule changes and standards;
changes in general economic, market and business conditions; the
impact of production agreements among OPEC and non-OPEC members;
the political and economic conditions in the countries in which
Cenovus and Husky operate or supply; the occurrence of unexpected
events such as pandemics, war, terrorist threats and the
instability resulting therefrom; and risks associated with existing
and potential future lawsuits, shareholder proposals and regulatory
actions.
Statements relating to "reserves" and "resources" are deemed to
be forward-looking information, as they involve the implied
assessment, based on certain estimates and assumptions, that the
reserves and resources described exist in the quantities predicted
or estimated, and can be profitably produced in the future.
Readers are cautioned that the foregoing lists of factors are
not exhaustive. Events or circumstances could cause the combined
company's actual results to differ materially from those estimated
or projected and expressed in, or implied by, the forward-looking
information. Readers should carefully consider the risk factors
discussed in each of Cenovus's and Husky's management's discussion
and analysis and annual information form for the year ended
December 31, 2019 and management's discussion and analysis for the
three and six months ended June 30, 2020. The information contained
on Cenovus's and Husky's websites is not incorporated by reference
into this news release. The reference to Cenovus's and Husky's
websites is intended to be an inactive textual reference.
You should not place undue reliance on the forward-looking
information contained in this news release, as actual results
achieved will vary from the forward-looking information provided
herein and the variations may be material. Cenovus and Husky make
no representation that actual results achieved will be the same in
whole or in part as those set out in the forward-looking
information. Furthermore, the forward-looking information contained
in this news release is made as of the date of this news release.
The purpose of the financial outlook in this news release is to
provide management's expectations of the effects of the
transaction. Except as required by applicable securities law,
Cenovus and Husky undertake no obligation to update publicly or
otherwise revise any forward-looking information or the foregoing
list of factors affecting those statements, whether as a result of
new information, future events or otherwise or the foregoing lists
of factors affecting this information.
This cautionary statement qualifies all forward-looking
information contained in this news release. The prospective
financial information included in this news release has been
prepared by, and is the responsibility of management of Cenovus and
Husky.
Oil and Gas Information
The estimates of reserves of Cenovus were prepared effective
December 31, 2019 by independent qualified reserves evaluators,
based on the COGE Handbook and in compliance with the requirements
of National Instrument 51-101 – Standards of Disclosure for Oil and
Gas Activity ("NI 51-101"). Estimates are presented using an
average of three IQREs January 1, 2020 price forecasts.
The estimates of reserves of Husky were prepared effective
December 31, 2019 by internal qualified reserves evaluators in
accordance with the COGE Handbook, were audited and reviewed by
Sproule Associates Limited, an independent qualified reserves
auditor, and represent the company’s working interest share.
Historical Husky production volumes provided are gross, which
represents Husky’s working interest share before deduction of
royalties.
Readers are cautioned that the term proved reserves life index
may be misleading, particularly if used in isolation. This measure
is used for consistency with other oil and gas companies and does
not reflect the actual life of the reserves.
For additional information about the reserves of Cenovus and
Husky and other oil and gas information, see “Reserves Data and
Other Oil and Gas Information” and "Statement of Reserves Data and
Other Oil and Gas Information" in Cenovus's and Husky's annual
information forms for the year ending December 31, 2019,
respectively.
The U.S. Securities and Exchange Commission (the "SEC")
definitions of proved and probable reserves are different from the
definitions contained in NI 51-101; therefore, proved and probable
reserves disclosed herein may not be comparable to U.S. standards.
The SEC requires U.S. oil and gas reporting companies, in their
filings with the SEC, to disclose only proved reserves after the
deduction of royalties and production due to others, but permits
the optional disclosure of probable and possible reserves.
About Cenovus
Cenovus Energy Inc. is a Canadian integrated oil and natural gas
company. It is committed to maximizing value by sustainably
developing its assets in a safe, innovative and cost-efficient
manner, integrating environmental, social and governance
considerations into its business plans. Operations include oil
sands projects in northern Alberta, which use specialized methods
to drill and pump the oil to the surface using a technique called
steam-assisted gravity drainage (SAGD). The company also has
conventional crude oil, natural gas and natural gas liquids assets
in Alberta and British Columbia as well as 50% ownership in two
U.S. refineries. Cenovus shares trade under the symbol CVE and are
listed on the Toronto and New York stock exchanges. For more
information, visit cenovus.com.
Find Cenovus
on Facebook, Twitter, LinkedIn, YouTube and Instagram.
About Husky
Husky Energy is a Canadian-based integrated energy company. It
is headquartered in Calgary, Alberta, and its common shares are
publicly traded on the Toronto Stock Exchange under the symbol HSE.
For more information, visit huskyenergy.com.
Find Husky on Facebook, Twitter, LinkedIn and
Instagram.
Cenovus Contacts |
Investor Relations Sherry Wendt, Director, Investor Relations
403-766-7711 |
Media Relations Reg Curren, Senior Advisor, Media
Relations403-766-7751 |
Husky Contacts |
Investor Relations Leo Villegas, Director, Investor Relations
403-513-7817 |
Media RelationsKim Guttormson, Manager, Communication Services
403-298-7088 |
Photos accompanying this announcement are available
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