Cenovus Energy is buying out its long-time SAGD partner in a deal that will see another non-Canadian player give up large chunks of operating oilsands assets.
While ConocoPhillips will retain its 50 percent ownership and operatorship of the Surmont SAGD project, it is selling its half of the non-operated Foster Creek/Christina Lake (FCCL) joint venture to Cenovus.
The deal, valued at $17.7 billion, also gives Cenovus a large, under-utilized chunk of ConocoPhillips’ conventional assets in the Deep Basin.
Cenovus CEO Brian Ferguson said on a conference call on Wednesday that the company has had in its eye on full ownership of FCCL—which also includes the partially built Narrows Lake solvent-assisted SAGD project—for some time.
“Consolidating ownership at Foster Creek, Christina Lake and Narrows Lake has consistently ranked as our most compelling strategic opportunity. [It] gives us complete control of our oilsands assets and provides full exposure to technology upside,” he said.
“Given we already fully operate the FCCL assets, we are effectively doubling our oilsands exposure with no integration risk.”
FCCL
Foster Creek was the industry’s first commercial SAGD project in 2001, followed by Christina Lake, its third, in 2002. Cenovus has since executed 14 expansion phases at the two facilities, which are industry high-performers.
Combined gross production was 327,822 bbls/d in the fourth quarter of 2016, with steam/oil ratios of 2.37:1 for Foster Creek and 1.86:1 for Christina Lake. The latter project is the only oilsands SAGD facility to consistently achieve an SOR below 2:1.
ConocoPhillips joined Cenovus in the FCCL partnership in 2007. The 50/50 upstream/downstream joint venture gave ConocoPhillips interest in Cenovus SAGD facilities and Cenovus interest in ConocoPhillips’ Borger and Wood River refineries in the United States.
A decade later, Cenovus says it will use its full ownership of the upstream assets to further drive down costs and improve efficiencies as it restarts construction on the 50,000 bbl/d Christina Lake Phase G project and as it works toward a new expansion sanction in 2018. The downstream partnership is not impacted by the deal.
“In a low oil price environment, economies of scale are important,” Ferguson said.
“This deal about doubles the scale of the company and gives us a greater competitive edge.”
The Deep Basin
Following close of the deal, which is expected in the second quarter, Cenovus will increase its expected 2017 production from 290,000 boe/d to 588,000 boe/d.
This is comprised of a 100 percent increase in oilsands production and a 107 percent increase in conventional production through entry into a new play for Cenovus.
“We also view this transaction as a strategic opportunity to establish an expansive presence in the Deep Basin, with more than three million net acres and an extensive inventory of short-cycle, high-return drilling oporutnities,” Ferguson said.
“Capital investment into our long-life assets will be complemented by short-cycle capital in the development of the newly-acquired Deep Basin assets.”
Cenovus has already identified 1,500 potential drilling locations that are competitive with U.S. resource plays, he said, and is planning to begin a program in 2017 and “ramp up activity significantly in 2018 and beyond.”
“We firmly believe we can transition this asset from value preservation to value creation,” Ferguson said, adding that a key part of the deal is access to 27 ConocoPhillips natural gas processing facilities that are currently at only about 40 percent utilization.
“This means the majority of our capital can go to simply drilling, completing and tying-in wells.”
The company plans to spend $170 million on a three-rig program in 2017 in the Elmworth/Wapiti areas, initially focusing on the Spirit River and Montney formations.
Cenovus expects to see 40 percent production growth in the area between 2017 and the end of 2019.
The deal
The $17.7 billion transaction is comprised of $14.1 billion in cash and 208 million Cenovus common shares, which both companies say indicates confidence in Cenovus’s ability to create value from the assets.
“This transaction will make an immediate and significant impact on the company’s value proposition by allowing us to rapidly reduce debt to $20 billion and double our share repurchase authorization to $6 billion,” ConocoPhillips said in a statement.
“This means we will not only accelerate, but exceed, the three-year plan we laid out in November 2016.”
The deal also includes a five-year contingent payment agreement on FCCL production that triggers when the price of Western Canadian Select (WCS) rises above C$52/bbl.
Cenovus expects to raise $3 billion in a new bought deal financing agreement announced at the same time as the transaction with ConocoPhillips.
The company has additionally initiated a process to sell its Pelican Lake and Suffield assets, which produced about 47,600 boe/d in 2016.
Non-Canadian divestitures
The divestiture from Texas-based ConocoPhillips follows three other multinational companies' sales of oilsands properties in recent months: Statoil in the purchase of its Leismer SAGD assets by Athabasca Oil Corporation in December for up to $832 million, and Royal Dutch Shell and Marathon Oil through Canadian Natural Resources' $12.74-billion buy of the Athabasca Oil Sands Project, in a package of deals that also included Shell's in situ oilsands assets.
The Surmont project that ConocoPhillips is retaining is held in a joint venture with France's Total SA.
In September 2015, Total reduced its interest in Suncor's Fort Hills mining project by 10 percent to 29.2 percent in a sale to Suncor valued at $310 million.
Suncor also purchased Arkansas-based Murphy Oil's five percent stake in the Syncrude project for $937 million in spring 2016.
Correction: This article previously stated that Chevron had sold its interest in the Athabasca Oil Sands Project to Canadian Natural, which is incorrect.
