On Oct. 25, 2020, Cenovus Energy Inc. (TSX: CVE) and Husky Energy Inc. (TSX: HSE) announced a transaction to create a new integrated Canadian oil and natural gas company which will have an advantage in upstream and downstream portfolio. Under this transaction, Cenovus and Husky will merge in an all-stock transaction valued at $23.6 billion, inclusive of debt.

This deal has been approved with one voice by the Boards of Directors of Cenovus and Husky and is expected to close in the first quarter of 2021. In the new entity, Cenovus will hold 61% equity ownership, and the rest 39% will be Husky’s share.

Swap ratio: 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.

Source: Company Presentation

Key Benefits of the Combination

Source: Company Presentation

Integrated Entity Post Merger Deal

This transaction is going to enhance the operating scale, through which the company will become the third largest Canadian integrated oil and gas producers with about 750,000 barrels of oil equivalent per day (BOE/d) of low-cost oil and natural gas production.

Financial Benefits of the Combination: The new entity is expected to generate an incremental CAD 1.2 billion of annual free funds flow, comprised of CAD 600 million in annual corporate and operating synergies and CAD 600 million in annual capital allocation synergies.

Enhanced free funds flow generation and strong liquidity: The new company is expected to report a free funds flow breakeven in 2021 at WTI prices of US$ 36/bbl; however, it is aiming to reduce this breakeven to less than WTI US$33/bbl by 2023. This is lower than the breakeven of either company on a standalone basis.

Source: Company

This new company is expected to have liquidity of CAD 8.5 billion in undrawn committed credit facilities and no bond maturities until 2022. They will also achieve low net debt/LTM EBITDA ratio.

Source: Company

Valuation of Husky Energy Based on Share Swap Arrangement

Recommendation

Based on the above valuation, we have given a “Hold” recommendation on Husky Energy at the closing price of CAD 3.55 on October 26, 2020.

Further, shares of CVE were trading at a forward EV/Sales multiple of a 0.9x, whereas Industry median EV/Sales multiple stood at 1.8x, implies a discounted valuation of CVE shares against the industry peers. Therefore, we have given a “Hold” recommendation on CVE at the closing price of CAD 4.47 on October 26, 2020.

CVE and HSE daily technical chart. Source: Refinitiv (Thomson Reuters)

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