March 30, 2017 / 3:17 PM / 5 months ago

Cenovus shares slump on $13 billion deal to buy Conoco's assets

Rows of steam generators line a road at the Cenovus Energy Christina Lake Steam-Assisted Gravity Drainage (SAGD) project 120 km (74 miles) south of Fort McMurray, Alberta, August 15, 2013.Todd Korol

CALGARY, Alberta (Reuters) - Cenovus Energy shares had their biggest one-day percentage fall ever on Thursday as investors balked at the company's C$17.7 billion ($13.3 billion) cash and stock deal to buy oil sands and natural gas assets from ConocoPhillips.

The acquisition announced on Wednesday, the fifth-biggest Canadian energy deal on record, will more than double Cenovus production to 588,000 barrels of oil equivalent per day and make it the third-biggest Canadian producer.

The company will become the sole owner of its flagship Foster Creek and Christina Lake oil sands projects and is also buying the majority of ConocoPhillips' western Canada Deep Basin conventional gas assets.

The offer was unsolicited, according to ConocoPhillips Canada spokesman Michelle McCullagh, who said her company had planned to market some Canadian assets as part of a disposition program but that this is a larger deal.

The transaction, to be financed through selling shares and divestitures, is greater than Cenovus' C$12.8 billion ($9.6 billion) market capitalization, and ratings agency DBRS placed the company under review with negative implications.

Cenovus shares closed down 13.8 percent on the Toronto Stock Exchange at C$15.05, while ConocoPhillips shares were up 8.8 percent.

"I'm extremely disappointed - not just the price paid on this acquisition, but also the strategy," said Norman MacDonald, portfolio manager on the Trimark Resources Fund with Invesco, which holds Cenovus shares.

The company was created to focus on unconventional crude, not hold gas assets such as Deep Basin, he said. "And up until yesterday, they had a really good balance sheet."

Through the deal Cenovus becomes one of the most levered oil companies, analysts at Raymond James said in a note.

ConocoPhillips is the latest international oil major to pull back from northern Alberta's oil sands, which is among the most costly plays in the world to develop.

Canadian players like Cenovus, Suncor Energy and Canadian Natural Resources Ltd are grabbing assets as multinationals retreat, betting improvements in thermal extraction technology will help them boost efficiency to compete against U.S. shale plays.

"The Canadian companies do not have any other particularly good options," said Doug Hollies, vice president of engineering at consultancy Codeco Oilsands Engineering and a Cenovus shareholder, who worked on the initial well design for Christina Lake.

"They are confident, but I think they may be a little overconfident and they are always going to be high cost producers," he added.

Additional reporting by David Ljunggren and John Tilak; Editing by Denny Thomas, Marguerita Choy and Leslie Adler

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