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Jun 20, 2017

Conoco deal to determine Cenovus' future and outgoing CEO's legacy

Shocking that Cenovus CEO didn't explain why company has fallen off cliff: Portfolio manager

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Outgoing Cenovus Energy (CVE.TO) CEO Brian Ferguson’s legacy seems destined to be tied to the success or failure of the blockbuster acquisition of ConocoPhillips’ (COP.N) oil sands assets.

The veteran oil man will depart as the only chief executive Cenovus has ever known on October 31. But the date is likely far too early to determine whether the $17.7-billion dollar deal will be viewed as a steal, or end up looking like a bad gamble.

Early results have been less than encouraging: shares of the company fell to an all-time low since the deal was announced, and badly underperformed both its peers in the energy group and the broader stock market. Addressing the media at the company’s first investor day since 2013, Ferguson acknowledged the pain investors have felt.

“I’m obviously very disappointed in the stock price,” he said “It’s been a difficult six months for our shareholders.”

Further exacerbating concerns is oil’s renewed weakness, with West Texas Intermediate falling below US$43 per barrel for the first time since last August. Cenovus used US$50 per barrel as its base-case scenario when modelling the deal, though Ferguson said the company can break even at US$41 per barrel once it divests its conventional oil assets.



“We think the metric seems reasonable, however the volatility in the commodity price may make it difficult to transact regardless and it looks like [Cenovus] definitely has their work cut out for them,” Bagnell wrote in a research note. “Remain on the sidelines for now… the asset divestiture process will be a show me story.”

At least one influential Calgary money-manager doesn’t think Cenovus will be able to gain sufficient traction on the markets to raise the desired funds. In an interview on BNN, Canoe Financial Director Rafi Tahmazian said with commodity prices at depressed levels, Cenovus won’t be able to dictate the terms in negotiations.

“They could very easily be six times debt-to-cash flow very quickly here with the direction oil’s been going, so that’s a risk that [divestitures] are not going to take and they’re going to throw more assets at the market,” Tahmazian said. “It’s not a seller’s market here. It’s a buyer’s market and they’re going to be a price-taker.”

Ferguson’s legacy in the eyes of investors will further be impacted by the company’s paltry dividend. Ferguson slashed the payout a pair of times in the depths of oil’s swoon, and Cenovus said Tuesday that while a dividend hike may come in the future, it won’t consider returning more cash to shareholders until after it digests the Conoco assets.

Asked if he would have done anything differently in constructing the transformative deal, Ferguson told reporters he had no regrets, an assertion Tahmazian scoffed at.

“Look at his stock price… it’s like a mountain climber fell off a cliff, broke all his bones and someone goes ‘how do you feel now?’” Tahmazian said. “‘Oh, I’m fine, I can’t wait to get up and climb back up that mountain.’ How about addressing your broken bones?”

“I’m absolutely shocked by this.”