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Cenovus to Sell Pelican Assets to Canadian Natural for C$975M

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Canadian oil major, Cenovus Energy Inc. (CVE - Free Report) recently agreed to divest its heavy oil properties in Pelican Lake and other eclectic assets to Canadian Natural Resources Limited (CNQ - Free Report) for C$975 million ($787 million) in cash, putting earlier speculation to rest. The deal is expected to be over by Sep 30, 2017.

Asset Details

Production of heavy oil in the Cenovus' Pelican Lake assets began in 1997 through horizontal wells. Polymer mixed water is used here to boost the production process and increase efficiency without causing damage to the environment.

The concerned assets currently produce 19,600 barrels of oil equivalent (BOE) heavy oil per day in northern Alberta, where price per flowing BOE a day is C$49,800.  First-half operating profit from the Pelican Lake assets is estimated at C$74 million.

Cenovus' wholly owned Pelican Lake property is located approximately 300 kilometers north of Edmonton. In this context, we would like to remind investors that Canadian Natural has its crude oil producing property near the oil project of Cenovus in Pelican Lake. Also, this is Canadian Natural’s second domestic acquisition this year after the buyout of the Athabasca oil sands from energy major Marathon Oil Corporation (MRO - Free Report) .

Deal Rationale

The deal is in line with Cenovus' strategy of divesting C$5 billion to back up the C$16.8 billion acquisition of Foster Creek Christina Lake assets from ConocoPhillips (COP - Free Report) in March 2017. The company plans to use the cash to partially pay down the $3.6 billion bridge loan facility that was part of the ConocoPhillips deal.

Investors should also know that with the deal, the first of the four key asset sales, the company plans to bring down its net debt to operating earnings ratio below 2 by 2019.

Properties ready for divestiture include Suffield shallow-gas assets in southeastern Alberta, Palliser in Alberta, Weyburn in Saskatchewan. These three properties have the capacity to produce a total of 85,000 barrels of oil equivalent per day. The Suffield gas assets can bring Cenovus around C$600 million. However, there are apprehensions that the sale of these properties may not bring the company the C$5 billion that it seeks. In that case, the company can divest its other non-core assets.

The deal will enable the company to optimize its asset portfolio as well as strengthen its balance sheet following the Foster Creek Christina Lake acquisition.

Effect of the Deal on Stock Price                                                    

As soon as speculation of the deal surfaced, it reversed the downward movement of the stock. It has gained almost 13% in the past seven days. The company is aggressively pursuing its divestiture plan and this can push share prices higher in the coming days.  

About Cenovus and Zacks Rank

Cenovus is an integrated oil company headquartered in Calgary, Alberta, Canada. The company remains focused on growing its oil projects and establishing natural gas and crude oil production in Alberta and Saskatchewan. Cenovus continues to work on advancing technologies to reduce the amount of water, steam, natural gas and electricity used in operations and to decrease surface land disturbance.

Cenovus presently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price Performance

Cenovus has lost 45.2% of its value year to date compared with 19% fall of its industry.

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