CVE To Acquire HSE

Husky Energy Inc. has announced:

a transaction to create a new integrated Canadian oil and natural gas company with an advantaged upstream and downstream portfolio that is expected to provide enhanced free funds flow generation and superior return opportunities for investors.

The companies have entered into a definitive arrangement agreement under which Cenovus and Husky will combine in an all-stock transaction valued at $23.6 billion, inclusive of debt. The combined company will operate as Cenovus Energy Inc. and remain headquartered in Calgary, Alberta. The transaction has been unanimously approved by the Boards of Directors of Cenovus and Husky and is expected to close in the first quarter of 2021.

Transaction highlights:

  • Accretive to all shareholders on cash flow and free funds flow per share
  • Anticipated annual run rate synergies of $1.2 billion, largely achieved within the first year, independent of commodity prices
  • Expected free funds flow break-even at West Texas Intermediate (WTI) pricing of US$36 per barrel (bbl) in 2021, and at less than WTI US$33/bbl by 2023
  • Low exposure to Western Canadian Select (WCS) locational differential risk while maintaining healthy exposure to global commodity prices
  • Increased and more stable cash flows support investment grade credit profile
  • Net-debt-to-adjusted-EBITDA ratio of less than 2x expected to be achieved in 2022
  • Anticipated quarterly dividend of $0.0175 per share (upon Board approval) and positioned for consistent growth
  • Husky shareholders will receive 0.7845 of a Cenovus share plus 0.0651 of a Cenovus share purchase warrant in exchange for each Husky common share


The transaction is structured through a plan of arrangement in respect of the securities of Husky under the Business Corporations Act (Alberta), and is subject to the approval of at least two-thirds of the votes cast by holders of Husky common shares. Hutchison Whampoa Europe Investments S.à r.l., which holds 40.19% of the Husky common shares and L.F. Investments S.à r.l., which holds 29.32% of the Husky common shares, have each entered into a separate irrevocable voting support agreement with Cenovus pursuant to which each has committed to vote all of its Husky common shares, representing, in total, approximately 70% of the Husky common shares, in favour of the transaction at the special meeting of Husky shareholders. In addition, Husky will also seek the approval of at least two-thirds of the votes cast by holders of outstanding Husky preferred shares voting together as a single class. If Husky preferred shareholder approval is obtained, each Husky preferred share will be exchanged for one Cenovus preferred share with substantially the same commercial terms and conditions as the Husky preferred shares. The transaction is not conditional on Husky preferred shareholder approval and, if not obtained, the Husky preferred shares will remain outstanding in a subsidiary of the combined company.

As a consequence DBRS placed HSE under Review-Negative:

DBRS Limited (DBRS Morningstar) placed Husky Energy Inc.’s (Husky or the Company) Issuer Rating and Senior Unsecured Notes and Debentures rating of BBB (high), Commercial Paper rating of R-2 (high), and Preferred Shares – Cumulative rating of Pfd-3 (high) Under Review with Negative Implications.

DBRS Morningstar assesses the business risk profile of the Combined Entity to be moderately stronger relative to Husky’s stand-alone business risk profile. However, the Under Review with Negative Implications status reflects DBRS Morningstar’s opinion that the impact of the stronger business risk profile will be more than offset by the weakness in the financial risk profile of the Combined Entity due to a material increase in debt levels at close and weaker financial metrics.

DBRS Morningstar expects to resolve the Under Review with Negative Implications status by the close of the transaction. Assuming the transaction closes as described in the plan of arrangement and based on DBRS Morningstar’s assumptions, the ratings of Husky by close is likely to be one notch lower than its current ratings.

… while placing CVE under Review-Positive:

DBRS Limited (DBRS Morningstar) placed Cenovus Energy Inc.’s (Cenovus or the Company) Issuer Rating and Senior Unsecured Debt rating of BBB (low) Under Review with Positive Implications.

The Under Review with Positive Implications status reflects DBRS Morningstar’s opinion that the Combined Entity’s overall risk profile will be stronger relative to Cenovus’s stand-alone risk profile given the material improvement in the business risk profile and a modest improvement in the financial risk profile.

DBRS Morningstar expects to resolve the Under Review with Positive Implications status by the close of the transaction. Assuming the transaction closes as described in the plan of arrangement and based on DBRS Morningstar’s assumptions, the ratings of Cenovus by close is likely to be one notch higher than its current ratings.

Meanwhile, S&P placed HSE on Review-Negative:

  • On Oct. 25, 2020, Husky Energy Inc. and Cenovus Energy Inc. announced their intention to merge under a plan of arrangement.
  • At the close of the transaction, Husky’s existing shareholders will own 39% of the combined company, which will operate under the Cenovus name.
    Upon completion, we expect the ownership interest of entities related to C.K. Hutchison Holdings Ltd. (A/Stable/–) will fall to 27%; accordingly, the one-notch uplift we currently apply to our issuer credit rating on Husky, based on our assessment of Husky as a moderately strategic investment for C.K. Hutchison, would no longer apply.
  • As a result, S&P Global Ratings placed all of its ratings on Husky, including its ‘BBB’ long-term issuer credit rating, on CreditWatch with negative implications.
  • We expect to resolve the CreditWatch placement when the transaction closes in the first quarter of 2021. The downside risk to all ratings is limited to one notch.


Despite the normalizing cash flow contribution from the company’s midstream assets and downstream operations, we expect the heavy oil-dominant upstream product mix will continue to amplify cash flow volatility. Our projected two-year (2021-2022) cash flow and leverage metrics, and overall financial risk profile estimate pro forma adjusted funds from operations to debt in the mid 20% area.

We expect to resolve the CreditWatch placement when the transaction is completed in the first quarter of 2021. The rating downside on the issuer credit rating on Husky is limited to one notch.

… while retaining the Negative Outlook for CVE:

  • On Oct. 25, 2020, Cenovus Energy Inc. and Husky Energy Inc. announced their intention to combine in an all-stock transaction valued at C$23.6 billion, under a plan of arrangement. The new integrated Canadian oil and natural gas company will operate under the Cenovus name.
  • At closing, pro forma share ownership for Cenovus and Husky shareholders is estimated at 61% and 39%, respectively. We expect the ownership interest of entities related to Husky’s major shareholder, C.K. Hutchison Holdings Ltd. (A/Stable/–), will decrease to about 27% of the pro forma company.
  • We take into account our ‘BBB-‘ issuer credit rating on Cenovus, and the ‘bbb-‘ stand-alone credit profile on Husky, before rating enhancement for Husky’s strategic relationship with its major shareholder, also at the same level.
  • S&P Global Ratings affirmed its ‘BBB-‘ long-term issuer credit and senior unsecured debt ratings on Cenovus.
  • The outlook remains negative pending completion of the combination.


The negative outlook continues to reflect the very weak near-term leverage metrics, and the risk cash flow and leverage ratios could underperform our base-case assumptions, if hydrocarbon prices again weaken beyond 2020. The substantial deterioration of the current year’s cash flow ratios highlights the company’s vulnerability to volatility in crude oil prices and heavy oil differentials, as bitumen production will continue to account for the majority of Cenovus’ upstream product mix.

In an environment of persistently weak crude oil prices and weak refining margins, we could lower the rating to ‘BB+’ if our estimate of the company’s three-year, weighted-average FFO-to-debt ratio remained near 20%, with limited prospects for improvement during our 24-month outlook period.

With the company’s capital spending expected to remain near maintenance levels throughout our 24-month rating outlook period, we believe cash flow metrics could only improve in tandem with rising crude oil prices. We could revise our outlook to stable if Cenovus was able to strengthen and sustain its three-year, weighted-average FFO-to-debt ratio at the upper end of the 20%-30% range, while continuing to generate positive discretionary cash flow (DCF).

Affected issues are HSE.PR.A, HSE.PR.B, HSE.PR.C, HSE.PR.E and HSE.PR.G.

Assiduous Reader ER writes in and says:

I was wondering if you could talk about what might happen to Husky preferred share holders on prefblog. What are the possible outcomes?

Assuming that the deal goes through, there are two possibilities for the HSE preferreds:

  • They are replaced by equivalent CVE preferreds, or
  • They remain as HSE preferreds, with HSE becoming a wholly-owned subsidiary of CVE

Of the two possibilities, the second is preferable for the preferred shareholders, since HSE is the better credit. Thus, I suggest that HSE preferred shareholders vote against the deal in order to ensure the continued existence of the HSE entity.

The logical thing for CVE to do to avoid this would be to offer a little sweetener to the preferred shareholders to vote yes … a few beeps extra on the Issue Reset Spreads, for instance, or an outright cash payment. This, however, would be a very rare happening.

4 Responses to “CVE To Acquire HSE”

  1. Eric R says:

    If HSE remains a wholly owned subsidiary, wouldn’t that mean its assets couldn’t be transferred to CVE? Does that make the prefs a poison pill to the whole HSE-CVE stock swap deal?

  2. jiHymas says:

    If HSE remains a wholly owned subsidiary, wouldn’t that mean its assets couldn’t be transferred to CVE?

    That is my understanding. As long as there are other stakeholders, then asset transfers must be done at something approximating fair value.

    Does that make the prefs a poison pill to the whole HSE-CVE stock swap deal?

    Not really. As long as they operate normally, then there’s just a bit of bookkeeping involved when, for instance, CVE contracts with HSE to refine some oil.

  3. stusclues says:

    FWIW, the Cenovus presentation on Sunday declares that the HSE prefs will be swapped for CVE prefs. Also this appears to be a true merger to eliminate cost (especially PEOPLE cost, bad for Calgary as probably 2000 highly paid jobs will be shed) and provide greater optionality in capital deployment. A wholly-owned subsidiary structure is highly doubtful IMO.

    My initial reaction to the deal was that this would drive the market spread of the HSE issues down due to the more stable and larger business created. Clearly, the rating agencies see it differently.

  4. Eric R says:

    Quite interesting… I guess we’ll see how it plays out. As a HSE Preferred share holder I want something closer to the call price. Getting $25 is probably not realistic, but definitely something better than the one for one swap proposed. As always, thanks for the enlightening comments James!

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