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Here's why investors reacted so differently to two similar oil sands deals

The market reaction was swift and negative to Cenovus, who bought assets from its oil sands partner, ConocoPhillips Co.

© Todd Korol / Reuters/Reuters

With two megadeals in the oil sands announced in a single month, the comparisons are inevitable.

The deals recently unveiled by Canadian Natural Resources Ltd. and Cenovus Energy Inc. involve large, experienced Canadian bitumen producers buying huge stakes from foreign players intent on largely exiting the oil sands. Both include arrangements that will see the international firms retain a reduced stake in the oil sands. Both accords are for "long-life resources and consolidating interest in an area you know well," said Mark Oberstoetter, Canadian oil and gas research manager at Wood Mackenzie.

But investors rewarded CNRL for its planned purchase of Royal Dutch Shell PLC's oil sands holdings while the market reaction was swift and negative to Cenovus buying assets from its oil sands partner, ConocoPhillips Co., for $17.7-billion this week. CNRL's share price jumped after its March 9 announcement while Cenovus shares plummeted by 14 per cent on the Toronto Stock Exchange Thursday – and mostly plateaued Friday.

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Off the top, there are different expectations for both companies.

Investors were caught relatively flat-footed by the high price paid and the whopping debt, including $10.5-billion in loans, Cenovus has taken on. In an investor presentation released earlier this month, Cenovus had called maintaining balance-sheet strength "a top priority."

There is also confusion about where Cenovus is now going to focus its time and energy. It said it will buy the majority of ConocoPhillips's Deep Basin assets, spread across 3 million acres in Alberta and British Columbia. It's a big change in strategy, said Brompton Group senior vice-president and portfolio manager Laura Lau. "Huh, you're buying gas assets. Huh? We didn't get any signalling about this. We don't understand," she said.

The net $7.25-billion (U.S.) CNRL/Shell deal, with a focus on core oil sands assets that CNRL knows well, is easier for investors to comprehend.

There are also concerns about the structure of the Cenovus deal, including the provision for five years of uncapped contingent payments for ConocoPhillips – triggered when Western Canada Select (WCS) crude prices exceed $52 (Canadian) per barrel. The agreement means Cenovus loses part of the upside from higher oil prices.

"Cenovus is taking on a contingent payment with a fairly lower trigger price," notes Mr. Oberstoetter. Although Statoil ASA could receive contingent payments from Canada's Athabasca Oil Corp. through their deal announced late last year, CNRL has not made any similar agreement with Shell.

People also view CNRL as getting a better overall deal than Cenovus. Ms. Lau notes what CNRL paid for Shell assets was significantly less than the cost to build new facilities. For Cenovus, people are asking whether the Canadian producer could have struck a much better bargain with its American partner.

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Investors are also worried, Ms. Lau said, because the deal makes Cenovus more vulnerable to heavy-oil differentials, or discounts. The company previously had less exposure to the volatility of crude markets because production fairly equally matched refining capacity. But now it will have many more barrels. And Cenovus is reliant on getting its bitumen to U.S. refineries, whereas CNRL can do upgrading and refining domestically.

And lastly, there is also the the star-power of CNRL executive chairman Murray Edwards. The reticent billionaire has become the undisputed king of Canadian oil patch deals by making contrarian bets. And when he takes the road less travelled, a loyal group of investors tend to follow.

For Cenovus investors willing to wait, however, there might be rewards. Mr. Oberstoetter noted oil sands assets are unique, and rarely come to market, so it's difficult to make full-on comparisons between the CNRL and Cenovus deals. He also said there's potential upside for Cenovus in the Deep Basin that is being overlooked.

"It's hard to get a fair judgment the day of, or the day after. I think there's some shock reaction," he said.

Ms. Lau said with oil prices likely to remain under $70 (U.S.) per barrel in the years ahead, the sector is not going to build more expensive oil sands mines. Cenovus, as the industry leader in steam-assisted gravity drainage (SAGD) drilling, is positioned for growth. SAGD means smaller, less-capital intensive projects that may still be given the green light, even in a lower-price environment.

"It makes sense to buy your best assets back – and their best assets are Foster Creek and Christina Lake," Ms. Lau said.

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"Strategically, it's the right thing to do. The question is: How do you do it?"

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Video: Carbon price not behind Shell’s oil sands sale: McKenna (The Canadian Press)
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