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Cenovus Asset Sale to Lundin Empire was to Help Pay Off Conoco Deal

September 26, 2017 by Kevin Orland

(Bloomberg) Cenovus Energy Inc. is selling oil and gas assets in Southern Alberta to the Swedish-Canadian Lundin family’s commodities empire, the latest effort to pay the tab on its takeover of ConocoPhillips’ oil-sands operations.

The sale of the Suffield operations to the Lundin Group’s International Petroleum Corp. will generate proceeds of C$512 million ($415 million) in cash, mostly meeting analysts’ projections and allaying investors’ concerns that it won’t be able to pay off the debt from its C$17.7 billion deal. The agreement also includes an adjustment that could give Cenovus an additional C$36 million in payments, the Calgary-based producer said Monday.

The Suffield deal marks the second sale from a package of assets Cenovus has been marketing to help pay off a C$3.6 billion bridge loan that it used to purchase Conoco’s Canadian operations in March. The divestiture process has been closely watched, with investors concerned that the current low-oil price environment would prevent Cenovus from generating the proceeds it needs.

Cenovus helped reduce those fears earlier this month after its C$975 million sale of the Pelican Lake heavy-oil project and other assets met analysts’ estimates and boosted the company’s shares. Cenovus still is seeking buyers for its Palliser and Weyburn operations and has said it is open to selling other pieces, such as midstream assets or royalties on its production.

“The remaining asset sales should fund the remainder of the loan,” said Travis Wood, an analyst at National Bank of Canada. He said the proceeds from the Suffield deal were “in line” with his estimates.

Analysts’ Projections

Other analysts concurred with that assessment. Justin Bouchard at Desjardins Capital Markets said the sale was slightly above the C$495 million midpoint of his expected range, and Greg Pardy at RBC Capital Markets said it was within in his projected range of C$480 million to C$600 million.

A dissenting voice was Raymond James’ Chris Cox. He said that while he expected the Suffield deal would be the most challenging from a valuation standpoint, it still was below his C$600 million forecast. Even if Cenovus hits the low end of its C$4 billion to C$5 billion target for asset sales, the company may need additional “meaningful” deleveraging to meet its debt reduction goals, he said.

“We continue to recommend investors take a cautious stance toward the broader asset sale process for Cenovus, as we suspect the remaining packages after Pelican Lake and Suffield could also disappoint to the downside,” he said in a note.

On Target

For its part, Cenovus said on Monday that it remains on target to reduce its net debt to less than two times its adjusted earnings before interest, taxes, depreciation and amortization.

Cenovus shares rose 0.5 percent to C$12.75 at 11:28 a.m. in Toronto. Cenovus had declined 37 percent this year through the end of last week. Vancouver-based International Petroleum advanced 9.1 percent to C$5.29.

The Suffield assets are currently producing 23,700 barrels of oil equivalent a day, with 72 percent of that output coming as natural gas. BMO Capital Markets acted as Cenovus’s financial adviser on the deal, which is expected to close in the fourth quarter.

International Petroleum, which holds assets in Malaysia, France and the Netherlands, was spun off from Stockholm-based Lundin Petroleum AB earlier this year so the parent company could increase its focus on Norway.

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