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Mar 30, 2017

‘It worries me’: What investors are saying about the $17.7B Cenovus-Conoco deal

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Cenovus Energy shares tumbled in early trading Thursday morning as investors reacted to the company’s $17.7-billion purchase of almost all of ConocoPhillips’ Canadian assets. BNN caught up with several Canadian fund managers to get their perspective on the deal. Here’s some of what they told us: 

Tom Caldwell, chairman, Caldwell Securities

There seems to be a strategic play going on here with a lot of foreign companies getting out of the tar sands-type of developments. I don’t know whether it’s environmental or they’re focusing on new supplies and the Canadian companies are buying. So, there is a pattern going on and clearly they’re gambling on oil prices being relatively firm. [At] US$50 everybody’s a happy camper.

It may well work out. It’s a courageous move. I think it’s going to turn out to be a good move no matter what the market does short-term.

Laura Lau, senior VP and senior portfolio manager, Brompton Group:

“Strategically it makes sense because it always makes sense to buy your own [assets] back – because you understand it best, you don’t have partners to deal with, and so integration risk is zero and you can cut costs.” 

Cenovus paid too much in Conoco deal: Portfolio manager

Cenovus was "too aggressive" in its deal to acquire assets from ConocoPhillips, according to Laura Lau, senior VP and senior portfolio manager at Brompton Group. Lau is also not impressed with how the transaction is being funded, saying Cenovus put itself in a position where it could be at risk of a debt-downgrade.

Ryan Bushell, vice president and portfolio manager, Leon Frazer & Associates:

“They’re basically putting their money where their mouth is. What I would say [about Cenovus shares falling] is that in the moment, the financial market tends to try to argue and make these positions based on numbers as they currently stand. …For me as a shareholder, as a long-term shareholder, you have to trust the management of these companies to make long-term decisions that are in your interest and buy when things are on sale.” 

Barry Schwartz, chief investment officer, Baskin Wealth Management:

“They’re just buying more of what they already operate. So, I don’t know if this is a wonderful plan or a bad plan. They’re not in the balance sheet business; they’re in the oil business. So, they have to put that cash to work.”

“The guys at Cenovus are going to have a prayer meeting every morning hoping that oil prices rise from here.”

John Stephenson, president and CEO, Stephenson & Company Capital Management:

“When you rank order projects globally, the oil sands look awful. They look awful because of the high capital costs to get them going. But once they get going, the operating costs aren’t that great. So, you can be quite comfortable [with oil] at 40, 45, 50 dollars – all of which is in reason in the next several years…OPEC is just grasping at straws to figure out how to combat [shale]. First, they tried to produce flat out, and then they tried this production cut. I don’t think they have a real clue how to handle it. They’re not the hammer they once were.

John Zechner, chairman and founder, J. Zechner Associates:

“You need to use your stock as a little bit of currency and you’ve got to scale up, try to get costs down. If you want to grow your earnings, you’re going to have to go out the curve a little bit and take on a little more risk, put on some debt, and do these acquisitions where you can scale out a little bit. But, it worries me because you’re increasing the risk profile.”       

   

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