Shares of Canadian integrated oil and natural gas driller Cenovus Energy (NYSE:CVE) dropped just shy of 15% as trading opened on Oct. 26. Meanwhile, Canada's Husky Energy (OTC:HUSKF) rose as much as 20% at one point. By noon EDT, Cenovus was down by around 12%, but Husky was only up roughly 8%. Both moved for the same reason -- Cenovus has agreed to buy Husky.
Husky shareholders will receive 0.7845 of Cenovus shares and 0.0651 of a Cenovus purchase warrant in exchange for each Husky share they own. Including the warrants, this is a 23% premium to the five-day average price at Oct. 23. The warrants are good for five years with an exercise price of CAD$6.54 per share. The deal values Husky at CAD$3.8 billion.
This is yet another example of the consolidation that's taking shape in the energy sector. Cenovus and Husky expect the deal to be immediately accretive to cash flow. They believe the combined entity will be able to implement annual cost savings of as much as $1.2 billion within the first year after closing. And the deal will make Cenovus the third-largest Canadian oil and gas company based on production, with a West Texas Intermediate break-even oil price of $36 per barrel. That break-even point is projected to drop to $33 per barrel by 2023.
The fact that mergers are taking shape in the energy sector is a good sign for the broader industry. Whether or not individual transactions, like this one, pan out is a bit harder to assess. The industry is so out of favor today that investors really aren't getting all that excited by the consolidation taking shape, and perhaps rightly so. To really see a benefit from this acquisition, the current supply/demand imbalance needs to correct itself. This deal should help that process along, but there's still a lot more that needs to be done before oil prices mount a sustained recovery. Until that recovery takes shape, investors probably aren't going to be too enthused about Cenovus' stock.