On Wednesday, Cenovus Energy Inc. agreed to buy all the western Canadian assets of natural gas and oil sands from ConocoPhillips for $13.3 Billion (CAD 17.7 Billion). This was the newest international oil major pulling back from a region where low crude prices and high costs have made it difficult for the large companies to get a return that is acceptable to them.
This deal doubles the production of Cenovus, a Calgary-based energy company, which is among the largest producers of Canada to about 588,000 barrels of oil per day when it would take full ownership of its assets of oil sands in Northern Alberta.
ConocoPhillips is going to sell 50% of their interest in the oil sands partnership of Foster Creek Christina Lake, which is already operated by Cenovus as well as most of their conventional gas assets of Western Canada Deep Basin.
They would retain 50% stake in the oil sands project of Surmont, which is a joint venture with Canada’s Total E&P, and they would also retain their Blueberry-Montney shale assets.
This divestment is the largest in the history of ConocoPhillips and was unexpected on the entire Wall Street, but this was due to the pressure on the company to cut down their debts. The company’s shares jumped by 6% in the afterhours trading.
Cenovus shares, on the other hand, tumbled about 8% in the afterhours trading at New York Stock Exchange.
According to Reuters’ data, this deal is the fifth largest in the energy sector of Canada. This deal comes just weeks after both Marathon Oil Corp and Royal Dutch Shell sold off oil sands assets worth billions of dollars due to the uncertainty over the future development in this sector.
Oil sands of Canada are the third largest crude reserve holder in the world, but they also have the highest costs in terms of operation when seen on a global scale. They are now struggling to compete with the shale plays in a price environment of $50 per barrel oil in the US.
The CEO of ConocoPhillips Ryan Lance said the company is going to use the cash portion of this deal to eradicate the debts on the company and increase repurchases of shares.
Last fall, the company told the analysts that they would spin off about $5 Billion of their assets to $8 Billion assets by the end of 2017. This divestment comes in line with this plan and it has boosted the planned sales of the assets for this year to about $16 Billion.
This deal is certainly going to be beneficial for both the companies in ways that are poles apart from each other.