CALGARY - Cenovus Energy Inc (TSX:CVE) has agreed to sell its royalty portfolio to the Ontario Teachers' Pension Plan in a $3.3-billion deal in a move to strengthen its balance sheet and secure a better valuation for its assets.
The Calgary-based oil producer said Tuesday that it will transfer ownership of its wholly-owned subsidiary, Heritage Royalty Limited Partnership, to the pension fund in a deal expected to close by the end of July.
Heritage holds 1.9 million hectares of oil and gas royalties and fee lands in Western Canada.
Amir Arif, an analyst at Cormark Securities Inc., said that while Cenovus already had a fairly good balance sheet after raising $1.5 billion in an equity sale in February, the extra cash will give the company the option of going ahead with some projects it has put on hold.
"It positions the company to start outspending cash flow again . . . once we get some clarity on the royalty review," said Arif.
Cenovus Energy had already confirmed on June 19 that it was in talks to sell its royalty lands but had provided no details.
The final deal included some extra royalties on Cenovus production that analysts weren't expecting, but Arif said the company secured a great price for the assets.
Last year Heritage Royalty had revenues of approximately $320 million based on average production of some 14,800 barrels of oil equivalent per day. Tuesday's deal puts a value of $223,000 for each barrel a day of production.
Kyle Preston, an analyst at National Bank of Canada, said that before the deal the royalty assets weren't being fully valued in Cenovus' share price.
"This was really a way to realize some value for shareholders, while also providing that additional flexibility in this environment."
Preston said that while companies are always looking at maximizing valuations, there is a definitely more focus on it today.
"This environment forces them to really roll up their sleeves and look for any incremental value they can find."
Last year Encana Corp. spun out its royalty portfolio in a $1.67-billion public offering to create PrairieSky Royalty Ltd (TSX:PSK).
Preston said that it made more sense for Cenovus to do a straight sale given the favourable price offered by Teachers' and the extra costs and complications of a public offering.
He said that the Teachers' Pension was able to offer the strong price thanks to a lower cost of capital than other companies, and in return it secures one of the largest fee-simple land packages in Canada, a type of land title that gives the owner mineral rights to the property in perpetuity.
Canadian Natural Resources Ltd. has also been considering the sale of its royalty portfolio, with company spokesperson Rouzana Barron saying in an email that the company is targeting 2015 for a decision on its assets.