The Ontario Teachers Pension Plan has agreed to pay Cenovus Energy Inc. C$3.3 billion to buy a portfolio of oil and natural gas royalty lands in Western Canada.
Calgary-based subsidiary Heritage Royalty LP (HRP) holds about 4.8 million acres of royalty and mineral fee title lands in Alberta, Saskatchewan and Manitoba, which generate revenue from drilling by other companies. HRP also holds gross overriding royalties on about 500,000 acres at Pelican Lake, an oil project, and Weyburn, a carbon dioxide storage project. Revenues in 2014 were C$320 million based on average production of 14,800 boe/d.
The transaction is designed to give Cenovus some financial breathing room, said CEO Brian Ferguson.
"The proceeds from this sale will strengthen our balance sheet and provide us with greater resilience during these uncertain times, as well as the flexibility to invest in organic projects with strong returns," he said.
As a result of the transaction, pro forma consolidated production would be reduced by 7,800 boe/d of third-party royalty interest volumes.
Cenovus in February raised C$1.5 billion in an equity sale. Since then management has considered options to increase the value of its royalties business, including a spinoff. The outright sale would improve the ratio of net debt to capitalization, which was 27% at the end of March. When Cenovus spun off from Encana Corp. in 2009, it took with it all of the oilsands property and the mature natural gas and oil assets, including the Heritage portfolio (see Daily GPI, Dec. 1, 2009).
The deal, led by the pension plan's Natural Resources Group (NRG), is expected to close by the end of July. NRG was created in 2013 to manage investments in timberland, agriculture and energy. With C$154.5 billion in net assets at the end of 2014, the group is the largest single profession pension plan in Canada.
"HRP has strong assets and operating partners generating recurring revenues that are an excellent fit...to pay pensions for the long term," said NRG Senior Vice President Ziad Hindo. "This acquisition provides an attractive risk-return valuation and complements our investment approach, which is shifting to more direct and diversified energy sector holdings."