According to a recent report by Reuters, ConocoPhillips (COP 1.22%) has held talks with investment banks about helping the company unload its stake in Cenovus Energy (CVE 0.35%). That sale could net the oil giant more than $2 billion in cash, which would bolster its already sizable cash war chest and give it more money to allocate in creating value for investors.
Thinking about cashing out
ConocoPhillips initially acquired its stake in Cenovus Energy last year, when it sold several oil and gas properties to the Canadian company for $13.3 billion in cash and stock. Overall, ConocoPhillips received $10.6 billion in cash and 208 million shares of Cenovus stock, which was worth about $2.7 billion at that time. ConocoPhillips used the initial cash infusion to repay debt and buy back billions of dollars in its stock. Those moves helped drive its share price up nearly 50% since it announced the deal.
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Cenovus' stock, on the other hand, has headed in the opposite direction since the deal's announcement due to concerns about the amount of debt it took on to complete the transaction. While Cenovus has tried to ease those fears by selling other assets, shares are still down about 30%, though that is a significant improvement from the bottom.
Because shares haven't fully recovered, ConocoPhillips' stake in Cenovus is worth around $2 billion based on the recent share price. However, the company would likely need to sell shares at a discount to the current price to find enough takers for what would be one of the biggest stock sales in Canada this year. While ConocoPhillips could make more money if it waited longer, or sold shares in phases, the company has made it clear in the past that it has no intention of being a long-term investor in Cenovus. Because of that, now is a decent time to consider cashing out since shares have bounced from the bottom.
What might ConocoPhillips do with the money?
ConocoPhillips ended the first quarter with $5 billion of cash on its balance sheet after paying off another $2.7 billion in debt during the quarter. While the company announced plans to use some of that money to pay off another $1.75 billion in debt, and it just closed a $400 million acquisition in Alaska, it has more cash coming. Not only is it generating excess cash from operations, but the oil giant recently received the final installment of an arbitration award from Ecuador as well as the first distribution from its investment in APLNG. Meanwhile, the company is also working to collect a $2 billion arbitration award from Venezuela.
With all of the money it has on the balance sheet and coming into its coffers, ConocoPhillips faces an interesting dilemma if it does decide to sell its stake in Cenovus. The company has few options for that excess cash since it has repeatedly stated it has no plans to boost capital spending above the current level, and it will soon hit its long-term debt reduction goal. As a result, the company's only remaining options are to let the money sit on its balance sheet, use it to make acquisitions, or return it to investors. Unless the company finds another unbeatable deal like its Alaskan purchase, the most likely option of the three is to send this money back to investors. It would probably do that by further expanding its share repurchase program beyond the $2 billion it already plans to spend this year, which is already $500 million higher than its initial guidance.
A nice problem to have
Even though ConocoPhillips doesn't need the money, it looks as though the oil giant is getting ready to unload its shares in Cenovus Energy. Given the company's financial discipline and strong balance sheet, it doesn't have much use for that money, which increases the likelihood that it will send the money back to investors by repurchasing more of its undervalued stock. That incremental buyback could help push shares up even higher, which is why it still looks like a compelling oil stock to consider buying.
