I have a couple random thoughts on the $CVE and $HSE merger. First off, I have high regard for $CVE ‘s assets. Christina Lake and Foster Creek SAGD they are really best-in-class (other than some $MEG assets). There is nothing in the HSE portfolio that I would consider comparable

So CVE is degrading it’s upstream asset quality w/ this merger for its shareholders. Is adding more midstream /downstream infra really worth it? From an investor standpoint the break even moves from $45/b (CVE) to $36/b (aim for $33/b) post synergies. That’s good.

Pro forma aiming for $1.2b in synergies with $600mm in six months and $900mm within first year. Given the compressed timeline for these savings I actually do believe they are achievable (unlike some of recent US deals). Longer-term any synergies from the physical integration of

FCCL and Lloyd are incremental to the $1.2b quoted in the release (which could be substantial). This is where real value from this deal could be surfaced but it will take a long time

What driving this deal? Husky’s biggest shareholder is Li Ka-shing and this was his decision. Backing up a bit to Q4/18 to when HSE tried to buy $MEG in a hostile takeover. They got most of the way to completion, then on Jan 16, 2019 walked away citing Alberta curtailment rules

It was shocking when HSE walked. Chatter at the time was that HSE had to abandon b/c of political pressure from the Chinese govt over Canada’s taking custody of Meng Wanzhou (CFO of Huawei) for extradition to US. This occurred on Dec 1, 2018 in the middle of Husky’s bid for MEG

This matters because at a minimum the failed MEG deal signaled 1. HSE desire to pair its assets with a low-cost SAGD operator 2. Nuked HSE takeover credibility meant they probably had to be a seller (no one would take serious as a buyer after what they did with MEG)

Proforma Li Ka-shing will own 15.7% through Hutchison and another 11.5% through L.F. Investments and have standstill and voting restrictions for “a maximum term of five years”. Really important to read the fine print on those terms.

proforma company will have a lot of net debt. Forecast +$12b (over 3x net debt/ LTM EBITDA) in 2021 but no maturities until 2022. Newco does not have to rely on asset sales to meet debt targets. CVE must have learned it’s lesson on this from when it bot $COP assets in 2017

This means the debt reduction is primarily due to FCF paying down debt (run at strip). This is important because it really ties new CVE to not increase capital (and production). Chalk up another producer that must not add new supply and stay really disciplined

What about brownfield CVE? Both FC and CL phase H were supposed to have FID in H2/20 but were pushed back indefinitely due to Covid price collapse. Combined were going to add ~105 mbbl/d ($1.8-$2b Capital) with first steam in 23/25. These projects had relatively low supply cost

Takeaway from this deal is that these recent mergers will have real tangible impacts on the NoAm supply picture in the future. I considered FCCL phase H expansion to be one of the first movers *if* there was increased spending in the oil sands. That’s likely off the table now

Also interested to see what happens to “husky midstream” which is owned 16.25% by CK Infrastructure / 48.75% Power Assets Holdings / 35% Husky with Husky operating. Owns 2,200 km of pipeline in AB /Sask, 4.4 mm barrels of oil storage capacity at Hardisty / Lloydminster

Also own gas processing at Ansell and Wembley (this will help deep basin synergies) where CVE is active.

Anyways this seems like a cash rich, infra hungry PE would be wise to look at buying this now that LKS is a seller. Very valuable and maybe the new CVE would sell it’s 35% piece to accelerate its debt repayment