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Cenovus Energy Inc. announced a $17.7-billion cash-and-stock deal for most of ConocoPhillips Co.'s oil sands assets late Wednesday. Here are five things to know:

It is one of the biggest energy deals – with a funding plan to match:

JPMorgan, one of the lead advisers to Cenovus, touted the transaction as the largest North American asset deal and the second-largest Canadian exploration and production transaction.

Cenovus said it would fund the deal with a combination of cash on hand, proceeds from planned asset sales and a $3-billion bought deal. It has also arranged $10.5-billion in loans.

Shares of the Calgary-based oil sands producer were down by as much as 12 per cent early in Thursday's session on the Toronto Stock Exchange before recovering somewhat. By mid-morning, the stock was hovering just shy of $15.50. That's below the bought-deal issue price of $16 apiece announced as part of the financing plan on Wednesday.

The tepid appetite reflects a broader malaise that has clung to the Canadian oil industry amid fears that U.S. Republicans will impose a border tax, crimping producer margins. U.S. investors in particular have avoided the sector, weighing on shares.

The transaction gives Cenovus a heavier debt burden:

Cenovus is taking on a lot of debt under the deal. That includes $10.5-billion in loans, pushing leverage higher even as oil prices hover around $50 (U.S.) a barrel. The company aims to repay some of that via asset sales in a market analysts say remains spotty for divestitures.

Under the current outlook for future oil prices, Raymond James Ltd. analyst Chris Cox said the company's net debt would more than double to 2.5 to three times earnings before interest, taxes, depreciation and amortization.

"Notably, this is prior to planned divestments, with the company already marketing its Pelican Lake and Suffield properties. However, even taking a more optimistic perspective on the potential value of these packages, we still see leverage increasing to more than 2.0x at strip pricing. Notably, this transaction effectively moves the company from one of the lowest leverage profiles in the peer group to the highest following the deal."

Five-year contingency payments limit upside:

Cenovus entered a five-year contingent payment agreement as part of the sale. The company is on the hook for payments to ConocoPhillips for each quarter in which the price of Western Canadian Select oil sands crude fetches more than $52 (Canadian) per barrel. It said the payments would be calculated by multiplying $6-million by the amount the average daily WCS price exceeds that threshold.

WCS for May delivery on Thursday fetched $11.90 less than West Texas intermediate crude, according to broker Net Energy Inc. That implies a value of $38.13 for the extra-heavy oil.

The arrangement means roughly 15 to 25 per cent of the upside from higher oil prices is lost to Cenovus.

Cenovus bulks up in a region it knows well:

Cenovus said its total production would double to 588,000 barrels of oil equivalent per day (boe/d) under the deal. That includes production capacity at its flagship Foster Creek and Christina Lake oil sands projects of 390,000 barrels per day.

It is also adding about 120,000 boe/d from lands in the Deep Basin region of Alberta and British Columbia. The company plans to spend about $170-million on the assets this year, with potential to increase output 40 per cent to 170,000 boe/d by 2019. It said it expects to retain key staff and has entered into a two-year technical-services agreement with ConocoPhillips to develop and operate the assets.

Cenovus also gains an inventory of expansion phases in the oil sands that have already been approved by regulators.

It's another example of consolidation in the oil sands by major Canadian players:

Earlier this month, Canadian Natural Resources Ltd. bought most of Royal Dutch Shell's oil sands holdings. That followed Statoil ASA's sale of its Leismer property to Athabasca Oil Corp. In 2016, Suncor Energy Inc. bulked up with a hostile takeover of Canadian Oil Sands Ltd.

Conoco is maintaining a toehold in the oil sands. The purchase price includes 208 million Cenovus shares valued at $2.7-billion (U.S.) at Wednesday's close. The Houston-based company also holds a 50-per-cent stake in the steam-driven Surmont joint venture with French oil major Total SA.

Ryan Lance, Conoco's chairman and chief executive, said the deal with Cenovus would accelerate the company's debt-reduction plans and allow it to buy back shares. "In a single step, the company has removed any residual concerns about its balance sheet or its ability to execute its buyback program," Barclays PLC analysts led by Paul Cheng said in a note. "As such, we think the event could be an important catalyst for the shares."

The stock rose by as much as 9 per cent in midday trading in New York.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 4:00pm EDT.

SymbolName% changeLast
COP-N
Conocophillips
+0.35%127.28
CVE-T
Cenovus Energy Inc
+0.56%27.08
CVE-N
Cenovus Energy Inc
+0.76%19.99
CNQ-T
Canadian Natural Resources Ltd.
+0.87%103.33
CNQ-N
Canadian Natural Resources
+1.13%76.32
SU-T
Suncor Energy Inc
+0.99%49.99
SU-N
Suncor Energy Inc
+1.18%36.91

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