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Is Cenovus overpaying for Husky? Analyst questions ‘excessive’ premium

Jeff Lagerquist
·3-min read
A combined Cenovus and Husky would still lag top Canadian oil players, according to one analyst.  REUTERS/Todd Korol (CANADA - Tags: ENERGY BUSINESS)
A combined Cenovus and Husky would still lag top Canadian oil players, according to one analyst. REUTERS/Todd Korol (CANADA - Tags: ENERGY BUSINESS)

Before many investors swallowed their first sip of coffee on Sunday morning, Cenovus Energy (CVE.TO)(CVE) announced a deal to acquire Husky Energy (HSE.TO) that would create Canada’s third-largest oil and gas producer. Now, one analyst is questioning the premium Cenovus agreed to pay on the $3.8 billion all-stock mega-merger.

Under the terms announced Sunday, Husky shareholders will receive 0.7845 of a Cenovus share, plus 0.0651 of a Cenovus share purchase warrant, in exchange for each Husky common share. This represents a 21 per cent premium excluding warrants, and 23 per cent when they are included.

“While the deal makes strategic sense, [we see the] 23 per cent premium as excessive,” Credit Suisse analyst Manav Gupta wrote in a note to clients Monday. “Given [Cenovus’] asset quality is far superior to [Husky’s], particularly on the thermal side, a mid-to-high single digit premium would have been sufficient.”

The deal has yet to be approved by the shareholders of each company.

Gupta lowered his “outperform” rating to “neutral” and cut his price target from $8 to $7 per share on Monday, calling for Cenovus’ stock to fall on news of the deal.

Toronto-listed shares were down 14 per cent to $4.19 at 11:04 a.m. ET on Monday.

Cenovus shares trading on the TSX on Monday, Oct. 26, 2020. (Yahoo Finance Canada)
Cenovus shares trading on the TSX on Monday, Oct. 26, 2020. (Yahoo Finance Canada)

Gupta notes Cenovus has shrunk its net debt from about $13 billion to about $7 billion between 2017 and 2019. The Husky deal, he said, will erase that progress with the addition of about $7 billion in net debt to the combined balance sheet.

“For multiple years, [Cenovus’] success was measured against its target of lowering net debt to below $7 billion,” he wrote. “Cenovus shareholders had a clear benchmark to measure its success, this deal changes the benchmark.”

Despite these critiques, Gupta stressed the need for Canadian companies to team up to address lower energy demand brought on by the COVID-19 pandemic, and said the combination should ultimately be “viewed positively.”

Raymond James analyst Chris Cox said he takes a “mixed view” of the deal from the Cenovus perspective.

“We question the pivot to reduce heavy oil exposure and add refining exposure at this juncture, as we believe the market is turning in the opposite direction,” he wrote in a research note on Monday. “The merger also greatly dilutes the quality of the upstream asset base, which has always been a key point of differentiation [for Cenovus].”

For Husky shareholders, Cox sees the combination as a “clear win,” with the deal carrying an “attractive premium” compared to other recently proposed transactions in the sector.

The question now, he said, is how the combined company will compete against large-cap Canadian energy peers. Cox said while the deal moves Cenovus in the right direction, it will continue to lag behind Canadian Natural Resources (CNQ.TO)(CNQ) and Suncor (SU.TO)(SU).

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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