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Lundin’s International Petroleum takes big bite with $500-million Cenovus deal

Oil storage tanks at the Cenvous operation at Pelican Lake credit

Rene Michaud - Bliss Photographic/Cenovus

Cenovus Energy Inc. is selling a southeastern Alberta oil and gas property to a company controlled by the wealthy Swedish-Canadian Lundin family, which is better known for investments in energy and mining projects in developing countries.

International Petroleum Corp., which is 29-per-cent owned by Lundin interests, will pay $512-million for Cenovus's Suffield property. Suffield is one of four large assets Cenovus earmarked for sale earlier this year, with proceeds going to paying down debt taken on its $17.7-billion acquisition of ConocoPhillips Co.'s oil sands and Alberta Deep Basin gas holdings.

The deal triples IPC's oil and gas reserves at a price that is above its overall market capitalization. It is funding the acquisition with debt, rather than issuing shares, and executives said it will be able to pay it down through cash flow, even as oil and gas prices languish.

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In a contingency arrangement, IPC agreed to pay Cenovus up to $36-million more if U.S. oil averages $55-to-$60 (U.S.) a barrel and natural gas averages $3.50-to-$4 per million British thermal units over the next two years. Oil sold for about $51.30 a barrel and gas for $2.93 per mmBtu on Monday.

Cenovus also agreed to contingency payments in its deal with ConocoPhillips. Such arrangements have grown in popularity as a way to help bridge gaps between buyers and sellers on differing commodity-price forecasts.

The transaction shows how nontraditional buyers are looking at Cenovus's properties as conventional exploration and production companies remain wary of funding acquisitions with equity issues after some, including Cenovus, suffered steep share-price drops earlier this year. Torxen Resources Inc., a private company led by former senior Cenovus executive John Brannan, had been speculated as a bidder for Suffield, and may still be in the running for another southern Alberta asset on offer called Palliser.

IPC was formed in early 2017, acquiring holdings in Europe and Malaysia from Lundin Petroleum AB. Its shares are listed in Stockholm and Toronto. The Lundin family also controls such ventures as Lundin Mining Corp., Lucara Diamond Corp., Denison Mines Corp., ShaMaran Petroleum Corp. and Africa Oil Corp. Its stable also includes BlackPearl Resources Inc., a Canadian heavy-oil producer.

IPC was attracted partly by the cash that Suffield generates as it will be about a year before the company invests large amounts to drill there, chief executive officer Mike Nicholson said. Cenovus, which has concentrated on its oils sands business, had not drilled any wells there for seven years. Current output is 24,000 barrels of oil equivalent a day.

"It's a quality asset with material reserves and production and material resource growth through time, and in a stable political environment with good fiscal terms and good operating costs and development costs," Mr. Nicholson told analysts. "We think this gives us a fantastic platform to generate a lot of value for our shareholders."

The company will keep looking for potential acquisitions in Canada even as it works to integrate the new business, he said.

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The transaction is the second this month by Calgary-based Cenovus as it tries to restore investor confidence dented by the oil sands deal, which was the second largest Canadian oil and gas deal ever. It sold its Pelican Lake heavy oil property and other assets to Canadian Natural Resources Ltd. for $975-million.

By the end of the year it plans to announce the sales of Palliser, which is a natural gas property, and Weyburn, a carbon-injected oil development in Saskatchewan.

Brian Ferguson, Cenovus's CEO, said the IPC deal keeps its asset sale goals on track.

Chris Cox, an analyst at Raymond James, said the proceeds for the Suffield deal were below his expectations, though the range of estimates among analysts was wide. The shares have recently gained as oil prices have improved and Cenovus's asset-sale plans appeared more attainable.

"On balance, we continue to recommend investors take a cautious stance toward the broader asset sale process for Cenovus, as we suspect the remaining packages after Pelican Lake and Suffield could also disappoint to the downside," Mr. Cox said in a research note.

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About the Author
Mergers and Acquisitions Reporter

Jeffrey Jones is a veteran journalist specializing in mergers, acquisitions and private equity for The Globe and Mail’s Report on Business. Before joining The Globe and Mail in 2013, he was a senior reporter for Reuters, writing news, features and analysis on energy deals, pipelines, politics and general topics. More

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