The all-stock deal, which will create Canada's third-largest energy group behind Canadian Natural Resources (CNQ) - Get Report and Suncor Energy (SU) - Get Report, was outlined Sunday and continues the theme of sector consolidation amid falling oil and gas prices and the potential for stricter regulations on drilling and permits in the coming years.
Cenovus shareholders will own around 61% of the combined group, the companies said, with Husky and its biggest investor -- Hong Kong-based billionaire Li Ka-Shing -- owning the remaining portion in exchange for 0.7485 Cenovus shares, which works out to a 21% premium to Husky's Friday closing price of $5.98 per share. Including debt, the total value of the transaction is around $18.1 billion.
“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 Cenovus CEO Alex Pourbaix. “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.”
Husky shares were marked 9.55% higher in early trading on the Toronto Stock Exchange to change hands at $6.55 each, while Calgary-based Cenovus fell 13.6% on the New York Stock Exchange to $3.20 each.
"The transaction is expected to yield significant cost synergies totaling $1.2 billion as well as giving the company increased scale and relevance," said BMO Capital Markets analyst Randy Ollenberger. "While the near-term market reaction may be mixed, we believe the transaction puts Cenovus in a better position to strengthen its balance sheet, generate free cash flow, and increase future returns to shareholders."