The deal removes a high-cost portion of the company's production at an attractive valuation, while generating proceeds that allow it to accelerate its debt reduction and shareholder return plans.
By Allen Good, CFA | 03-30-17 | 05:00 AM | Email Article

 ConocoPhillips  has reached a deal to sell its 50% nonoperated interest in the Foster Creek Christina Lake, or FCCL, oil sands partnership to partner Cenovus for $13.3 billion. Payment will consist of $10.6 billion in cash and 208 million shares of Cenovus, valued at $2.7 billion. The deal also includes five years of contingency payments if Western Canadian Select exceeds CAD 52. We view the deal favorably, as it removes a high-cost portion of ConocoPhillips’ production at an attractive valuation, while generating proceeds that allow it to accelerate its debt reduction and shareholder return plans, which it laid out in November during its analyst day. Proceeds will go toward reducing gross debt to $20 billion from $27 billion in 2017 and doubling its outstanding share-repurchase program to $6 billion from $3 billion. The company now plans to repurchase $3 billion in 2017, versus $1 billion previously, and to complete the remaining $3 billion in 2018 and 2019. ConocoPhillips continues to market assets previously marked for disposal and now expects total asset sales to exceed $16 billion in 2017. Guidance items remained unchanged. The company expects to generate the same amount of cash flow, despite the loss of 265,000 barrels of oil equivalent per day of production, thanks to offsetting interest savings. We plan to incorporate the asset sale into our model but do not expect to make a material change to our fair value estimate. We retain our no-moat rating.

Allen Good, CFA, is an energy strategist for Morningstar.

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