Jon Erlichman

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One of the biggest takeaways from Cenovus Energy Inc.’s all-stock deal to acquire Husky Energy Inc. is that it may help Cenovus break down some big walls.

Many on Bay Street largely view Cenovus as a Canadian oil sands play that is ultimately tied to the ups and downs of oil prices in Canada.  

Being viewed in such terms at a challenging time for the energy industry has not inspired much investor confidence this year.

Meanwhile, Cenovus continues to deal with the debt load it took on following its 2017 purchase of most of ConocoPhillips’ assets in Canada

Bulking up through an all-stock deal when industry stock prices are low accomplishes several things.  

First, by being the third-largest Canadian oil and natural gas producer, Cenovus boosts its cash flow and can use some of that money to continue paying down its debt.

Secondly, it opens the door to the kind of diversification any investor can appreciate in his or her own portfolio.

In Husky, Cenovus acquires what many considered the most integrated Canadian energy company after Suncor Energy Inc.

Yes, Husky produces oil like Cenovus, but it also has plenty of refining operations, as well as offshore assets, which provide Cenovus with exposure to Asia. In addition, it owns a retail gas business.

All of that, according to one industry veteran, helps shift the focus away from the volatility of oil prices.

“My philosophy has always been that companies built on a multi-leg stool have resilience to commodity price swings,” Gwyn Morgan, former CEO of EnCana, the company from which Cenovus was formed, told BNN Bloomberg in an email.

“The Cenovus/Husky combination will bring the largest non-mining oil sands producer together with a large upgrader and refiner. If crude price discounts increase, refinery margins in increase and visa-versa.”

It is also worth noting that Cenovus will also be one of Canada’s largest natural gas producers, which according to Morgan, equally plays an important hedging role.

“The combination will also be one of Canada’s largest natural gas producers. Since natural gas is needed for the steam assisted oil production process, low gas prices mean higher oil profits. And if gas prices rise, gas production margins offset the higher steam generation costs,” he said.

Through Husky, Cenovus also acquires pipelines that, in some cases, run adjacent to its oil sands production – not to mention help crude to flow down to the United States.

That may help diminish constant worries about Cenovus’ reliance on Enbridge’s pipeline network.

It could also serve as a U.S. presidential election hedge, depending on how pipeline policies play out south of the border.