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Why Cenovus Energy Inc (USA) (CVE) Shares Plunged Today

Cenovus Energy Inc (USA) (NYSE:CVE) shares are sharply lower in morning trading after the company agreed to buy some major assets from ConocoPhillips (NYSE:COP).

Specifically, Cenovus Energy Inc (USA) (NYSE:CVE) has agreed to acquire from ConocoPhillips (NYSE:COP) a 50% interest in the FCCL Partnership, the companies’ jointly owned oil sands venture, and the majority of ConocoPhillips (NYSE:COP)’ deep Basin conventional assets in Alberta and British Columbia in exchange for $10.6 billion in cash and 208 million Cenovus common shares. When combined, the assets are expected to produce around 298,000 BOE/day for 2017. The deal is expected to close in the second quarter of 2017.

Management expects the purchase to be immediately accretive to key metrics, and to potentially result in an 18% increase in 2018 adjusted funds flow per share compared to its original pre-purchase forecast.

CEO Brian Ferguson said,

“This transformational acquisition allows us to take full control of our best-in-class oil sands projects and to add a second growth platform across the prolific Deep Basin that provides complementary short-cycle development opportunities. The acquisition is accretive and significantly increases Cenovus’s growth potential. Going forward, we plan to focus capital spending on these two value platforms. At the same time, we intend to divest a significant portion of our legacy conventional assets to help fund the transaction.”

Although the move is expected to improve Cenovus in many ways, shares of the stock are down due to the company announcing a 187.5 million share ‘bought-deal’ offering at 16 Canadian dollars a piece. Underwriters have the option to buy an additional 28.125 million shares as well.

What Does The Smart Money Sentiment Say?

At Insider Monkey, we’ve developed an investment strategy that has delivered market-beating returns over the past 12 months. Our strategy identifies the 100 best-performing funds of the previous quarter from among the collection of 700+ successful funds that we track in our database, which we accomplish using our returns methodology. We then study the portfolios of those 100 funds using the latest 13F data to uncover the 30 most popular mid-cap stocks (market caps of between $1 billion and $10 billion) among them to hold until the next filing period. This strategy delivered 39.7% gains over the past 12 months and outperformed the 24.1% gain enjoyed by the S&P 500 ETFs. Our enhanced small-cap hedge fund strategy returned more than 45% over the last 12 months and outperformed SPY by more than 30 percentage points over the last 4.5 years (see details here).

According to our data, the smart money was slightly less bullish in the fourth quarter than in the third quarter. Of the 742 top funds in our database, 17 were long Cenovus Energy Inc (USA) (NYSE:CVE) at the end of December, down 3 funds from the previous quarter. Cliff Asness‘ AQR Capital Management cut its stake by 59% to 1.96 million shares while Jonathon Jacobson‘s Highfields Capital Management went the other way and increased its holdings by 253% to 3.52 million shares.

The Bottom Line

Cenovus Energy Inc (USA) (NYSE:CVE) shares are down due to the dilution required to finance a major asset purchase that could pay off in the long run. For those of you interested, check out this interesting list of countries running out of oil.

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