Cenovus Energy Inc. (TSX:CVE)(NYSE:CVE) recently made headlines when it agreed to spend $17.7 billion to buy most of ConocoPhillips’s (NYSE:COP) Western Canadian assets.
The prime asset included was the 50% ownership stake in the Foster Creek Christina Lake oil sands partnership, which Cenovus already operates.
Cenovus shares fell sharply on the news, mostly because the company announced it would sell more than 200 million shares to help pay for the deal at a discount to the market price.
CEO Brian Ferguson said the company would sell many of its legacy conventional oil assets to help pay for the deal. Essentially, Cenovus signaled to the market it intends to concentrate on the oil sands.
This is not a popular position to take. Investors are generally bearish on the oil sands today. Conventional production is cheaper than ever, and shale drillers are reporting their wells have break-even prices of $30 or $35 per barrel.
Meanwhile, heavy oil continues to sell at a significant discount. West Texas Intermediate is more than $50 U.S. per barrel today. Western Canada Select is flirting with $40 per barrel.
Cenovus first cut its formerly generous dividend from $0.27 per share each quarter to $0.16 in 2015. It then slashed the payout again in early 2016, to $0.05 per share. That’s where it stands today, for a 1.4% yield.
With 208 million new shares coming to pay for its latest acquisition and a weaker balance sheet almost a certainty, the most likely scenario is the company just maintains its payout, much to the chagrin of dividend investors. An increase isn’t coming until the price of crude heads much higher.
