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Cenovus moves into the big leagues

Cenovus moves into the big leagues

ConocoPhillips is the latest global energy player to divest Canadian assets, this time to Cenovus Energy.

Cenovus has agreed to buy-out its partner's 50% interest in the FCCL (Foster Creek & Christina Lake) Partnership for $17.7 billion, including $14.1 billion in cash and 208 million Cenovus shares (TSX:CVE). FCCL includes the Christina Lake and Foster Creek SAGD operations, both operated by Cenovus.

The acquisition boosts Cenovus' 2017 bitumen production guidance from 178,000 to 356,000 bbl/day, making it the fourth largest player in the sandbox (after Suncor, CNRL and Imperial Oil).

Cenovus says it plans to resume construction of the phase G expansion at Christina Lake, which has already recommenced module assembly. Phase G will add 50,000 bbl/day at a capital cost of about $16,000 to $18,000 per flowing barrel. Construction is expected to peak in mid-2017 with first oil expected in the second half of 2019.

Cenovus will update its shareholders in June on its plans for Foster Creek phase H expansion and the new Narrows Lake SAGD project, including capital costs and timing. Foster Creek phase H has a design capacity of 30,000 bbl/day while Narrows Lake will have an initial design capacity of 45,000 bbl/day.

If all goes according to plan, the company expects to top 500,000 bbl/day of bitumen production in about 5 years time.

The purchase also includes ConocoPhillips' Deep Basin conventional assets in BC and Alberta. The acquisition effectively doubles Cenovus' total production from 290,000 to 588,000 bbl/day.

Cenovus has also agreed to pay ConocoPhillips a contingency payment if Western Canadian Select (WCS) rises above $52/barrel (CAD). WCS currently sits just below $52/bbl.

Cenovus has taken on a $10.5 billion bridge loan and also announced the issuance of $3 billion in new common shares through a bought-deal offering. The company has also put its Pelican Lake and Suffield conventional assets up for sale, calling the properties "non-core."

ConocoPhillips says it was looking to sell its Canadian conventional natural gas assets but had not considered selling its oil sands assets until approached by Cenovus. The company still retains its 50% stake in the Surmont development, owned jointly with French energy giant Total.

ConocoPhillips says it will use the funds to pay down debt and buy-back US$6 billion worth of shares (NYSE:COP). ConocoPhillips also says the sale will help it lower the average production costs across its entire portfolio.

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