Cenovus sells royalty business for $3.3 billion

CALGARY, Alberta -- Cenovus Energy has reached an agreement to sell Heritage Royalty Limited Partnership (HRP) for gross cash proceeds of approximately $3.3 billion. HRP holds approximately 4.8 million gross acres of royalty interest and mineral fee title lands in Alberta, Saskatchewan and Manitoba.

In the first quarter of 2015, HRP had associated third-party royalty interest volumes of approximately 7,800 boed. Additional royalties have also been added to HRP - a royalty on Cenovus's working interest production with implied first quarter volumes of approximately 5,400 boed, as well as a Gross Overriding Royalty (GORR) on Cenovus's Pelican Lake heavy oil property in northern Alberta and its enhanced oil recovery project in Weyburn, Saskatchewan, with implied first quarter volumes of 1,600 boed. The GORR represents less than 15% of HRP's cash flow.

"We believe this agreement captures significant value for Cenovus shareholders from our royalty and fee lands business," said Brian Ferguson, Cenovus' president and CEO. "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."

Cenovus's decision to sell HRP to Teachers' is the outcome of a rigorous marketing process that attracted significant interest. Over the past several months, the company considered several alternatives to generate value from the business, including a potential initial public offering. After a thorough review, the transaction with Teachers' was determined to be the best alternative to maximize value for Cenovus shareholders.

"We believe this transaction will realize value that isn't currently reflected in our share price," Ferguson said.

At the end of the first quarter, the company's net debt to capitalization ratio was 27%, which significantly improves with this transaction. Cenovus's pro forma cash position at the end of the quarter would have been $5.1 billion, or $6.16 per outstanding share. As a result of the transaction, Cenovus's consolidated production, on a pro forma basis, will be reduced by the 7,800 boed of third-party royalty interest volumes.

Where Cenovus has current working interest production on these fee lands, the company has entered into lease agreements with HRP. Royalty rates and lease terms are attractive to Cenovus and are not expected to materially impact the free cash flow currently generated from these assets.

To help preserve the future growth and development of its conventional oil and gas business, the company has also retained an option to acquire leases at pre-determined rates and lease terms for up to 10 years on more than 800,000 acres in zones of the fee lands currently being developed by Cenovus. Approximately 40 staff members of HRP will be transferred as part of the transaction.

The effective date of the transaction is Apr. 1, 2015, and it is expected to close by the end of July 2015, subject to certain conditions. Cenovus plans to provide more details about how it will use the proceeds from this sale once the deal closes.