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Cenovus closes Husky transaction

Deal creates oil and gas leviathan

Screen Shot 2020-10-26 at 12.57.24 PMCenovus Energy Inc. has announced that its strategic combination with Husky Energy Inc. has now closed. The transaction was completed through a definitive arrangement agreement announced on October 25, 2020, under which Cenovus and Husky agreed to combine in an all-stock transaction.

With the close of the transaction, Husky has become a wholly-owned subsidiary of Cenovus. The combined company will continue to be headquartered in Calgary.

“This is an exciting day for Cenovus as we become a leaner, stronger, more fully integrated oil and natural gas company that is exceptionally well-positioned to weather the current environment and be an energy leader in the years ahead,” said Alex Pourbaix, Cenovus president & CEO. “With the closing of this transaction, we will focus on safely and efficiently integrating the assets and teams of these two great companies while working to realize the $1.2 billion in synergies we’ve identified. These cost and capital efficiencies, combined with our strong portfolio of well-matched upstream production, midstream and downstream assets as well as improved financial strength, are expected to generate strong value for our shareholders.”

The combination creates Canada’s third-largest crude 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. Cenovus is also now 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). The company also has access to about 265,000 bbls/d of current takeaway capacity from Alberta on existing major pipelines, 305,000 bbls/d of committed capacity on planned pipelines and 16 million barrels of crude oil storage capacity as well as strategic crude-by-rail assets that provide takeaway optionality.


Suncor’s Q4 takes a hit

Newfoundland project in question

Suncor, Canada’s leading integrated energy company, has announced it will record a $425 million non-cash after-tax impairment charge in the fourth quarter of 2020 on its share of the Atlantic offshore White Rose asset and West White Rose Project.

White RoseThe West White Rose Project was cast originally as a partnership between Husky Energy, Nalcor and Suncor. However, the recent acquisition of Husky Energy by Cenovus, a $21 Billion Calgary-based oil and natural gas company, has placed a shadow on the future of the West White Rose Project where plans are to access 200 million barrels (gross) of crude oil and extend the life of the offshore White Rose field by approximately 14 years. Discussions are ongoing with the operator and various levels of government to determine the future of the project.

Suncor’s 2021 guidance remains unchanged as the White Rose field will remain online producing as expected. 

The White Rose asset joint venture owners are Cenovus (operator, 72.5%) and Suncor (27.5%). The West White Rose Project joint-venture owners are Cenovus (operator, 69%), Suncor (26%) and Newfoundland and Labrador provincially owned energy corporation Nalcor (5%).



Cenovus/Husky merger to result in a smaller workforce 

25% decrease in combined employee levels expected

Screen Shot 2020-10-26 at 1.02.15 PMThe Cenovus Energy/Husky Energy merger will result in a much smaller workforce when the two companies combine. Most of the cuts will take place in Calgary, where both businesses have large offices.
“As with any merger of this type, there will be overlap. There will be some difficult decisions as we work to create a combined organization best positioned for the future,” said Cenovus spokesperson Reg Curren, mentioning that the reductions will be approximately 20% to 25% of the combined workforce, which is currently about 8,600 employees and contractors.
Altogether, synergies from the all-stock buyout of Husky by Cenovus are projected to result in annual savings of $1.2 billion. $400 million of these savings will come from workforce optimization. Another $200 million in savings will come from sharing technical expertise. $600 million more will come through better use of capital.
The combined companies will have a sustained output that is about 25% less than they would require separately. Together the Cenovus/Husky union will produce close to 750,000 barrels of oil equivalent per day for about $2.4 billion a year.

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Cenovus and Husky to consolidate

Massive deal reshapes Canadian oil and gas sector

Screen Shot 2020-10-26 at 12.57.24 PMCalgary-based Cenovus Energy has announced that it has entered into a merger agreement with Husky Energy Inc. Under the terms of the agreement, Cenovus will combine with Husky Energy for (C)$23.6 billion in an all-stock transaction. Together the companies will trade as Cenovus Energy and will remain headquartered in Calgary. The deal, approved by both boards of directors, is expected to close Q1 of 2021. 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.

The idea behind the merger is to create a resilient integrated energy leader with an advantaged upstream and downstream portfolio. When the deal is complete Cenovus will become Canada’s number three oil and gas producer behind Suncor and Canadian Natural Resources.

The consolidation of the industry is a trend that is occurring globally. Recently in the U.S. ConocoPhillips picked up Concho Resources while Chevron bought Noble energy. Here in Canada Canadian Natural Resources purchased assets from Shell and Marathon Oil in 2017 to become the country’s number two player in oil & gas production. This deal between Husky and Cenovus is the largest oil & gas sector M&A in the last four years.

“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,” says Alex Pourbaix, Cenovus president and CEO. “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 president and CEO Rob Peabody agrees. “Bringing our talented people and complementary assets together will enable us to deliver the full potential of this resilient new company,” he says pointing to 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.

Altogether, the company will be the third-largest Canadian oil and natural gas producer, based on total company production. Combined, Cenovus 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 (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. Also, it will have 16 million barrels of crude oil storage capacity as well as strategic crude-by-rail assets that provide takeaway optionality.



Falling oil prices hitting production

Husky cancels plan to sell off network of retail gasoline stations



Oil and gas prices continue to move downward despite moves from OPEC+ and others to curtail supply. The response from producers has been to cut spending, trim outputs and curtail share buybacks and dividends as the world reels from both the COVID-19 slowdown and the recent Saudia-Russia output feud.

Despite last week’s OPEC+’s output deal, the oil market is hugely oversupplied. This comes at a time when COVID-19 lockdowns have reduced global crude demand by about 30%. Storage tanks around the world are rapidly filling, including at the key U.S. storage hub in Oklahoma.

Monday (April 20) saw oil suffering its biggest one-day price plunge ever. Reports have levels crashing about 40% to below US$11 a barrel as the industry deals with a record glut of supply. Futures contracts for May and June also fell precipitously with traders running what amounted to a fire sale due to their inability to store production. Influential petroleum sector Hedge Fund manager Pierre Andurandhas even suggested the world could well see negative prices in the coming period. “There is no limit to the downside to prices when inventories and pipelines are full,” he said in a recent Tweet.  Texas-based buyers are offering as little as $2 a barrel for some oil streams, raising the possibility that producers may soon have to pay to have crude taken off their hands.

The impact of oversupply is resulting in well shutdowns and changes in corporate planning. In the U.S., companies involved in crude exploration idled 13% of the American drilling fleet by mid-April. Here in Canada prices for Western Canadian Select dropped below zero on Monday. Producers are in crisis mode. 

For example, Husky Energy has cut its 2020 capital expenditure by an additional C$700 million and reduced production by more than 80,000 barrels per day (BPD). And, yesterday Husky told OCTANE they have now dropped their plan to sell off their network of retail gasoline stations.

“Due to the current market environment, Husky has suspended the strategic review of its Canadian retail and commercial fuels business, which consists of more than 500 stations, travel centres, cardlock operations and bulk distribution facilities,” says Husky Energy spokesperson Kim Guttormson.

Another producer, ConocoPhillips, announced that it expects to reduce production at its Alberta facilities by approximately 100,000 barrels of oil per day to 35,000 BPD by May. Company CEO Ryan Lance cited COVID-19 and general market uncertainty with oversupply and demand falling as reasons for the reduction in production.

Suncor Energy Inc. said last week that it too planned to cut output. The Calgary-based oil co reported it would reduce production at its Fort Hills oilsands by about 70,000 BPD.

Crescent Point Energy Corp. is also planning to cut. The company reported that it will slice its capital spending plan for a second time and reduced its production guidance for the year. The company lowered its capital spending to about $675 million, down from its original budget of $1.15 billion. It also lowered its annual average production forecast by 20,000 barrels of oil equivalent per day or about 15% to about 112,000 BPD for 2020.

Cathedral Energy Services Ltd. and McCoy Global Inc. both announced job cuts, reductions to executive pay and lower capital spending plans this week. Cathedral told media that it has cut its office and shop staff by 22%, while the remaining Canadian non-field staff has moved to a four-day workweek with a corresponding 20% reduction in salary.

 Analysts are forecasting that Canadian petroleum production could fall by more than one million barrels per day if market prices remain depressed.





Husky Energy to sell Prince George, B.C., oil refinery to Tidewater

Husky Energy Inc. has agreed to sell its light oil refinery in Prince George, B.C., for $215 million in cash plus adjustments to Tidewater Midstream and Infrastructure Ltd.

Tidewater may also pay up to an additional $60 million over two years under certain contingencies.

The refinery uses crude oil and condensate from B.C. and Alberta to produce about 12,000 barrels per day of low-sulphur gasoline and diesel fuel.

The two Calgary-based companies say the refinery’s employees will be retained after the deal closes.

Tidewater says the Prince George region is generally in short supply of refined products.

Husky will buy 90% of the refinery’s diesel and gasoline capacity for five years, with prices subject to review, to supply its Husky retail gasoline stations and Husky retail partners.

The sale is part of Husky’s plan to focus on a series of physically linked assets in Western Canada as well as its offshore oil and gas production off Canada’s East Coast and in the Asia-Pacific region.

Husky said Friday that it continues to conduct a strategic review of its retail and commercial fuels businesses.

‘We’re deeply sorry:’ Husky fined $3.8M for leak into North Saskatchewan River

Husky Energy was fined $3.8 million for a pipeline oil leak that fouled a major river, harmed fish and wildlife and tainted the drinking water supply for thousands of people in Saskatchewan.

“We recognize that the spill had a significant impact on communities along the North Saskatchewan River and we’re deeply sorry for that,” Duane Rae, the company’s vice-president of pipelines, said outside court in Lloydminster, Sask.

“We’ve been working hard since that day to try to set things right.”

The spill into the North Saskatchewan River in July 2016 forced the cities of North Battleford, Prince Albert and Melfort to shut off their water intakes for almost two months.

Calgary-based Husky pleaded guilty to three environmental charges: two under federal migratory birds and fisheries legislation and one under a provincial law for releasing a harmful substance.

The federal Crown withdrew seven other charges.

About 225,000 litres of diluted heavy oil spilled from Husky’s pipeline near Maidstone in west-central Saskatchewan. The company said about 40% made it into the river and more than 90% of the oil was recovered.

Provincial court Judge Lorna Dyck accepted a joint recommendation from lawyers on an amount for the fine.

“This case has been a difficult and a challenging one for a number of reasons,” she said in her decision.

She noted that two alarms had gone off but were not recorded or reported to senior staff.

“Once the leak was discovered, Husky acted quickly and properly,” said the judge. “I believe Husky has learned from this mistake.”

“There’s no doubt it has had a detrimental affect on Husky’s reputation and on the industry as a whole,” said Rae. “We have expended a lot of money on the cleanup – over $140 million.”

A victim impact statement filed by three Indigenous communities in the area said the cleanup wasn’t good enough. Chief Wayne Semaganis spoke on behalf of his Little Pine First Nation and also for the Sweetgrass and Red Pheasant bands.

He said birds, wildlife and fish still suffer the effects of the contamination and the First Nations have lost traditional use of their land.

“We no longer fish in the river. We no longer trap on or near reserve lands. We no longer farm on or near reserve lands,” he said. “We no longer drink water drawn from reserve lands.”

Semaganis said the Indigenous communities remain anxious, fearful and psychologically stressed.

The cities of North Battleford and Prince Albert also filed victim impact statements that were read out by the Crown.

“The impact was dire, ongoing and will cause long-lasting changes to procedures and processes,” said the statement from North Battleford’s city manager James Puffalt.

Prince Albert’s statement said the spill caused significant disruption and stress for residents and had considerable costs.

Spray parks were closed at the peak of the summer holidays. Laundromats were shut down. Car washes couldn’t operate and businesses had to close.

“The city was forced to implement its emergency operations centre,” said the statement.

The city also had to lay temporary lines to two nearby rivers for drinking water.

Saskatchewan prosecutor Matthew Miazga told court there has never been an environmental event as significant in the province.

“Literally tens of thousands of people downstream were impacted.”

Environment Canada investigator Jeff Puetz said staff put their full effort into getting information.

“We did search warrants and gathered tens of thousands of copies of documents from Husky in order to get enough evidence,” he said.

The company said the pipeline buckled and leaked because of ground movement.

The line was allowed to reopen in October 2016 after being repaired and inspected.

Husky CEO Rob Peabody noted in a release that the oil and gas producer has been doing business in the Lloydminster region for more than 70 years.

“We understand that some people think we could have done better. After having such a long and successful history in this region, the event three years ago was a disappointment for all of us.”

He added that the company has made improvements that include an updated leak response protocol, regular geotechnical reviews of pipelines and fibre optic sensing technology.