ConocoPhillips (NYSE: COP) today announced it has signed a definitive agreement with Cenovus (TSX: CVE) (NYSE: CVE) to sell its 50 percent nonoperated interest in the Foster Creek Christina Lake (FCCL) oil sands partnership, as well as the majority of its western Canada Deep Basin gas assets, for total proceeds of $13.3 billion. ConocoPhillips Canada will retain its operated 50 percent interest in the Surmont oil sands joint venture and its operated 100 percent Blueberry-Montney unconventional acreage position.
Total proceeds for the transaction are $13.3 billion before customary adjustments, consisting of the following considerations:
- $10.6 billion of cash, payable at closing; and
- 208 million Cenovus shares, valued at $2.7 billion on March 28, 2017.
In addition, the company will receive five years of uncapped contingent payments, triggered when Western Canada Select (WCS) crude prices exceed $52 Canadian dollars per barrel. Using March 28, 2017 foreign exchange and differentials, WCS of CA$52 per barrel would equate to WTI of approximately $52 per barrel.
“This is a significant, win-win opportunity for ConocoPhillips and Cenovus,” said ConocoPhillips Chairman and Chief Executive Officer Ryan Lance. “This transaction will make an immediate and significant impact on the company’s value proposition by allowing us to rapidly reduce debt to $20 billion and double our share repurchase authorization to $6 billion. This means we will not only accelerate, but exceed, the three-year plan we laid out in November 2016. The transaction is accretive to our cash margins and lowers the average cost of supply of our portfolio, with no impact to our estimate of cash provided by operating activities at $50 per barrel Brent price. We will retain upside to future oil price increases through our equity stake in Cenovus and an uncapped, five-year contingent payment. ConocoPhillips Canada will now focus exclusively on our Surmont oil sands and the liquids-rich Blueberry-Montney unconventional asset. Cenovus will assume sole ownership of FCCL and assume operations in the Deep Basin assets. This is truly a transformational event for both companies.”
The company intends to use the cash portion of the transaction proceeds to reduce debt to $20 billion in 2017 and increase the level and pace of share repurchases. The ConocoPhillips board of directors approved an increase in the existing share repurchase authorization to a total of $6 billion, which is double the previous $3 billion authorization. The company also intends to triple its planned 2017 buybacks from $1 billion to $3 billion, with the remaining $3 billion allocated to 2018 and 2019.
The full-year 2017 estimated production associated with the assets being sold is 280 thousand barrels of oil equivalent per day net after royalty (NAR), comprised of approximately two-thirds liquids and one-third gas. The full-year estimated 2017 production and operating expenses associated with the assets being sold is $0.4 billion. The company’s previously stated estimate of cash provided by operating activities (CFO) of $6.5 billion at $50 per barrel Brent is unchanged as CFO from the disposition is roughly offset by lower interest expense. The company does not expect any change to 2017 capital expenditures. Year-end 2016 reserves associated with the asset dispositions were 1.3 billion barrels of oil equivalent NAR.
“We laid out a bold and unique value proposition in late 2016 that was focused on free cash flow generation, a strong balance sheet, returning cash to shareholders, disciplined growth and improved returns,” said Lance. “Our stated plan was to accelerate our value proposition by reducing debt with asset sales. Clearly, this transaction significantly accelerates those efforts and provides an important catalyst that should allow investors to have clarity and confidence in our future direction. Today’s announcement clears the way for us to execute a plan that we believe will create long-term value and deliver double-digit returns to shareholders annually.”
The disposed assets had a net book value of approximately $10.9 billion as of Dec. 31, 2016. The transaction is subject to specific conditions precedent being satisfied, including regulatory review and approval. The company expects to record a gain on sale upon closing, which is expected in the second quarter of 2017. Additionally, the company expects to recognize a financial tax accounting benefit of approximately $1 billion in the first quarter of 2017, which results from the capital gain component of the transaction and recognition of previously unrealizable tax basis. Tax expense associated with the sale will be recorded at the time of closing.