Quick Value 2.15.21 ($CVE)

Cenovous Energy ($CVE) -- Canadian oil merger

Market Performance

Small stocks and oil continue their rapid tear… Though most everything has been grinding higher for weeks now.

Market Stats

For those of us holding out for cheaper stocks — I recently counted a list of 227 stocks (minimum market cap of $200m) trading at less than 20% above their 52-week low…

Not much to work with here!

Quick Value

Cenovous Energy Inc ($CVE)

Next up on the energy M&A list is Cenovous, which announced its acquisition of Husky Energy in October 2020 to become the 3rd largest Canadian energy producer. Both Cenovous and Husky operate in the Canadian oil sands with some offshore oil production and oil refining assets.

The transaction places them as one of the top Canadian integrated oil companies with Canadian Natural Resources (CNQ) and Suncor (SU).

Just like with Devon and Conoco, this transaction was an all-stock deal (no added debt) and the company highlights their low breakeven level ($36/bbl) and illustrative free cash flow under different oil prices:

At $55/bbl, Cenovus/Husky believe they can generate $3-4bn in free cash flow (assuming no growth capex)… Pretty impressive on a $13bn market cap.

Leverage isn’t high following the deal but management is committed to getting down to 2x net debt to EBITDA by 2022. This goal was predicated on < $50 oil prices so they may get there a bit faster if prices hold up…

Peers CNQ and SU both trade at 5.5-6x EBITDA on 2022 estimates while CVE trades around 5x EBITDA.

On the surface, this looks very similar to the transactions highlighted in the past 2 weeks. Oil prices have been recovering lately so it will be a good opportunity to test these management teams on their ability to hold back production growth and favor shareholder returns!