CK Hutchison is backing an all-stock C$23.6 billion (US$18 billion) merger between its unit Husky Energy and Cenovus Energy as the Canadian oil and gas producers seek to end a trail of losses from a slump in global oil prices.
The Hong Kong unit, run by Victor Li Tzar-kuoi, will sell its 40.19 per cent interest in Husky to Cenovus in return for a 15.7 per cent equity stake in the combined entity, according to a joint announcement on late Sunday. Husky shareholders will receive 0.7845 of a Cenovus share, plus 0.0651 of a Cenovus share purchase warrant.
The combination will create Canada’s third-largest oil and gas producer with a capacity to produce 750,000 barrels of oil equivalent per day and generate annual synergies of C$1.2 billion. It will also produce free funds flow break even with West Texas Intermediate benchmark at US$36 per barrel in 2021, and at less than US33 per barrel by 2023, the companies added.
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“The merged company will be stronger and better,” a person familiar with the deal said, adding that no equity accounting will be required as its stake drops below 20 per cent. “CK Hutchison will have less earnings exposure to low oil prices, but will have much greater value if oil prices rise.”
Crude futures fell 1.9 per cent to US$39.85 in New York on Friday, capping their first weekly loss in three amid concerns about supply glut. Prices have struggled for traction since they dropped below US$100 in June 2014, and plunged into a negative zone in April after the Covid-19 outbreak.
Husky Energy posted a C$2 billion net loss in the six months ended June 30, according to regulatory filings, compared with a C$698 million profit in the same period in 2019. The loss was C$956 million before non-cash impairment, post IFRS 16 accounting. Cenovus also reported a C$2 billion net loss in the same period, versus a C$1.9 billion profit a year earlier.
Husky Energy last traded at C$3.17, having declined 70 per cent this year. Cenovus traded at C$4.88 and has lost 63 per cent of its market value this year. CK Hutchison last traded at HK$46.40 and its shares have tumbled 63 per cent this year.
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“The price collapse in crude market combined with a demand shock for refined products resulted in Husky Energy’s worst performance in memory,” Li said in his interim report in August as chairman of CK Hutchison. Husky reduced capital expenditures, shut in cash-negative margin production and implemented cost-saving measures in an extended low commodity price environment, he added.
CK Hutchison, which owns the Husky stake through its Hutchison Whampoa unit in Europe, has given its support to the transaction. LF Investment, another shareholder with a 29.32 per cent stake, is also supporting the deal. Both undertakings will be enough to ensure the merger, which requires two-thirds of votes from shareholders to pass, according to the announcement.
The combined unit will be known as Cenovus Energy, and will be led by current Cenovus chief executive Alex Pourbaix. Husky’s finance chief Jeff Hart will become its chief financial officer.
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