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Here's Why ConocoPhillips Will Sell $13.3B Canadian Assets

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Upstream energy company ConocoPhillips (COP - Free Report) recently announced its decision to divest a huge chunk of its Canadian properties to Cenovus Energy Inc. (CVE - Free Report) . The transaction value is estimated to be around $13.3 billion.

The agreement, which is anticipated to close by second-quarter 2017, makes ConocoPhillips the third firm to offload a significant portion oil sand resources in western Canada in March. Earlier this month, Royal Dutch Shell plc agreed to sell a number of oil sands properties to Canadian Natural Resources Limited (CNQ - Free Report) for a sum of almost $7.3 billion. In a similar agreement, Marathon Oil Corporation (MRO - Free Report) divested its Canadian affiliate to Shell and Canadian Natural Resources.

Benefits of the Deal

Let’s analyze ConocoPhillips’ motive behind divesting the Canadian assets. Under the accord, the company would divest its 50% non-operated stake in the Foster Creek Christina Lake oil sands partnership and also the bulk of its western Canada Deep Basin gas properties. The company primarily aims to lower exposure to those assets as the cost of operation in these properties is high.

This apart, ConocoPhillips plans use the sale proceeds to reduce its debt burden to $20 billion. Also, it intends to return money to investors by repurchasing shares. It is to be noted that ConocoPhillips is likely to buy back $3 billion shares in 2017. Another $3 billion stock repurchase would be executed through 2018 and 2019.

Transaction Details

Out of the proceeds of $13.3 billion, around $10.6 billion will be in cash. The remainder will be in 208 million Cenovus shares valued at $2.7 billion as of Mar 28, 2017. ConocoPhillips is also expected to collect uncapped contingent payments for five years when Western Canada Select (WCS) crude prices exceed C$52 per barrel.

Price Performance

ConocoPhillips shares outperformed the Zacks categorized Oil & Gas-U.S Exploration & Production industry over a period of three months. During the aforesaid time span, the stock lost almost 3% compared to 10.2% decrease for the broader industry.

About the Company

Houston, TX-based ConocoPhillips has operations and activities in 17 countries, including the U.S., Canada, the U.K./Norway, China, Australia, offshore Timor-Leste, Indonesia, Libya, Nigeria, Algeria, Russia and Qatar.

The company is considered to be the largest exploration and production player in the world, based on proved reserves and production. Notably, the business scenario of upstream energy companies is not very favorable as oil is still way below the level it attained in mid-2014.

As a result, ConocoPhillips carries a Zacks Rank #3 (Hold).

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