ConocoPhillips Delivers Huge Win for Shareholders

Print Email

Things have improved handily from a year ago in the energy sector. Still, even with a pro-energy White House, things are far from perfect in the oil and gas sector. Now ConocoPhillips (NYSE: COP) is delivering great news to its shareholders.

After the close of trading on Wednesday, ConocoPhillips announced that the company has signed a definitive agreement with Cenovus Energy Inc. (NYSE: CVE) to sell its 50% interest (which is a non-operated interest) in the Foster Creek Christina Lake oil sands partnership and the majority of its western Canada Deep Basin gas assets. The total proceeds are shown to be a whopping $13.3 billion before customary adjustments.

As of the close of trading on Wednesday, ConocoPhillips had a market value of about $56.8 billion. Transactions of this sort can be transformational for many companies.

ConocoPhillips Canada will retain its operated 50% interest in the Surmont oil sands joint venture and its operated 100% Blueberry-Montney unconventional acreage position.

The breakdown of the proceeds is $10.6 billion of cash, payable at closing, and the other $2.7 billion in value is derived from 208 million Cenovus shares based on the price on March 28, 2017.

ConocoPhillips announced that the cash portion of these proceeds will be used to reduce its corporate debt to $20 billion in 2017, and funds also will be used to double its existing share repurchase authorization to $6 billion from the current $3 billion.

All in all, the company’s board of directors approved a doubling of the authorized buyback plan. The company further said that it also intends to triple its planned 2017 buybacks from $1 billion to $3 billion as a result. The remaining $3 billion allocated for buybacks will come in 2018 and 2019.

The company noted that the transaction will significantly improve its underlying financial metrics and improve its portfolio. That may be an understatement considering that this will boost the credit profile and will shrink the float.

ConocoPhillips shares closed up 1.3% at $45.95 on Wednesday, in a 52-week trading range of $38.19 to $53.17. Its consensus analyst price target is $57.71, but its shares were up another 5% at $48.25 in Wednesday’s after-hours trading session.

ConocoPhillips Chairman and Chief Executive Officer Ryan Lance said:

This is a significant, win-win opportunity for ConocoPhillips and Cenovus. 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.