Cenovus Energy (NYSE:CVE) announced Wednesday it plans to swallow most of the Canadian assets belonging to ConocoPhillips (NYSE:COP) in a $17.7 billion blockbuster acquisition... [CVE shares dropped 13.7% on Thursday as investors reacted negatively to the purchase. This article outlines the details of the purchase and what investors are saying about the deal.]

BNN.ca

Cenovus CEO Brian Ferguson called it a "transformational acquisition" for the Calgary-based company saying on a conference call: 

"In a low oil price environment, economies of scale are important, and this deal about doubles the scale of the company and this will give us a greater competitive edge."

The sale, announced after the close of markets on Wednesday, includes:

• ConocoPhillips's 50% interest in the FCCL Partnership in northern Alberta, made up of the Cenovus-operated Foster Creek and Christina Lake oil sands projects — which in total produce about 390,000 barrels per day — and a proposed third major development called Narrows Lake;
• the majority of ConocoPhillips's Deep Basin conventional assets in western Alberta and northeastern British Columbia, boosting its conventional output from 112,000 to 232,000 barrels of oil equivalent per day this year;
• $14.1 billion in cash and 208 million Cenovus common shares;
• a five-year agreement that will see it make additional payments to ConocoPhillips if the average daily price of Western Canadian Select rises above $52 per barrel. Western Canadian Select averaged $39.14 per barrel last month, according to the Alberta government.

It said it expects to generate total 2017 production of about 588,000 boe/d if the sale closes, more than double its forecast of 290,000 boe/d.

ConocoPhillips chairman and CEO Ryan Lance called the deal a "win-win" and said it would allow his company to reduce its debt saying in a statement that:

"ConocoPhillips Canada will now focus exclusively on our Surmont oil sands and the liquids-rich Blueberry-Montney unconventional asset."

Surmont is a joint venture oil-sands project with French oil giant Total with capacity of about 140,000 bpd....

Cenovus said:

• it plans to raise $3 billion in an offering of shares to help pay for the acquisition, supplemented by cash on hand and debt financing...
• it has put its legacy Alberta conventional assets at Pelican Lake and Suffield up for sale
• and plans to sell additional non-core conventional assets to raise money to reduce debt.

Cenovus Energy shares tumbled 13.7% on Thursday...

BNN caught up with several Canadian fund managers to get their perspective on the deal. Here’s some of what they told us:

Tom Caldwell, chairman, Caldwell Securities

...Clearly, they’re gambling on oil prices being relatively firm. At US$50 everybody’s a happy camper. It may well work out. It’s a courageous move. I think it’s going to turn out to be a good move no matter what the market does short-term.

Laura Lau, senior VP and senior portfolio manager, Brompton Group:

Cenovus was "too aggressive" in its deal to acquire assets from ConocoPhillips, according to Laura Lau. She is also not impressed with how the transaction is being funded, saying Cenovus put itself in a position where it could be at risk of a debt-downgrade.

Ryan Bushell, vice president and portfolio manager, Leon Frazer & Associates:

“They’re basically putting their money where their mouth is...For me as a shareholder, as a long-term shareholder, you have to trust the management of these companies to make long-term decisions that are in your interest and buy when things are on sale. The deal is coming at or near the bottom of the cycle, and I suspect the purchases will look like a steal in 10 years." 

Barry Schwartz, chief investment officer, Baskin Wealth Management:

“They’re just buying more of what they already operate...They have to put their cash to work. The guys at Cenovus are going to have a prayer meeting every morning hoping that oil prices rise from here.”

John Stephenson, president and CEO, Stephenson & Company Capital Management:

“When you rank order projects globally, the oil sands look awful. They look awful because of the high capital costs to get them going but once they get going, the operating costs aren’t that great so you can be quite comfortable [with oil] at 40, 45, 50 dollars – all of which is reasonable in the next several years"….

John Zechner, chairman and founder, J. Zechner Associates:

“You need to use your stock as a little bit of currency and you’ve got to scale up, try to get costs down. If you want to grow your earnings, you’re going to have to go out the curve a little bit and take on a little more risk, put on some debt, and do these acquisitions where you can scale out a little bit but, it worries me because you’re increasing the risk profile.”

1229 people responded to our survey question "What’s your reaction to Cenovus’s $17.7B deal with Conoco?"

Great opportunity to grow : 34%

Risky bet on stable oil prices : 20%

Hire back some laid off workers instead: 6%

Smart exit by Conoco : 39%