Cenovus (TSX: CVE) today announced they are purchasing the remaining 50% interest in the Sunrise oil sands assets for C$600 million plus another C$600 million in contingent consideration, plus a 35% interest in the “Bay du Nord” project in Quebec, a currently undeveloped offshore project.
The contingent consideration is quarterly payments of $2.8 million for every dollar that Western Canadian Select is above CAD$52/barrel, for up to 2 years, and a maximum of C$600 million. Considering that WCS is currently at about CAD$130, this will work out to $220 a quarter. Barring a complete disaster in the oil sands, it is a virtual certainty the entire C$600 million will get paid out.
I have no idea how to value the 35% Bay du Nord project stake and will zero this out for the purposes of the following calculations.
Cenovus made a $56.20 netback in their Q1-2022 oil sands productions. Sunrise, not being the best asset on the planet, is about $15/barrel more expensive to operate and transport, so we will calculate a $41/barrel netback. However, the royalty structure is in pre-payout, compared to post-payout and hence netback will be higher by about $10/barrel. Very crudely (pun intended!) I estimate around $51 netback (estimated to last 7-8 years before the full post-payout rate kicks in). CVE will acquire 25k boe/d, so they are acquiring about $465 million of netback with $1.2 billion spent, or about a 39% return.
This does not assume that CVE will be able to scale up the operation to 60k boe/d as stated in the release, which would add another $186 million/year, or about 15% extra, ignoring the incremental capital costs of the project.
Tax-wise, CVE still has a $17.6 billion shield at the end of 2021, so the impact of income taxes will not kick in for at least a couple years. Even assuming full income taxes and ignoring the extra 10kboe/d production, CVE is purchasing something for a 30% after-tax return in today’s commodity environment. That’s pretty good for shareholders!