Many of the world’s largest oil companies have been ridding themselves of oil sands assets thus far in 2017.
Shell sold most of its stake in the region to Canadian Natural Resources Limited (TSX:CNQ)(NYSE:CNQ), while ConocoPhillips sold its stake to Cenovus Energy Inc. (TSX:CVE)(NYSE:CVE). Cenovus shares have gotten crushed after it announced the sale, falling more than 20%.
Shares fell for a couple of reasons. Investors weren’t happy to see the company double down on the oil sands in today’s weak environment.
And the deal will require Cenovus to issue 208 million shares to ConocoPhillips, as well as selling 188 million shares to raise cash. It also plans to sell about $4 billion in assets to help pay for the $17.7-billion deal.
The deal will substantially increase Cenovus’s reserves. Before the acquisition was announced, Cenovus was sitting on approximately 3.8 billion barrels of oil. After the deal is completed, reserves will effectively double to 7.76 billion barrels.
When the deal is done, Cenovus will have an enterprise value of approximately $28.1 billion, assuming the value of shares stay where they are today. The company has 7.76 billion barrels of proved and probable reserves. This means investors are paying just $3.62 per barrel of oil in the ground.
There are costs to extract oil, of course. But Cenovus has done an impressive job lowering an already low cost base. The company projects operating and sustaining capital costs will be less than $17 per barrel for its oil sands production. This focus on costs will really pay off when crude eventually starts to recover.
