Cenovus earnings overshadowed by unpopular ConocoPhillips deal

By Ethan Lou and John Tilak CALGARY, Alberta/TORONTO (Reuters) - As Cenovus Energy Inc prepares to release first-quarter earnings this week, investors are looking for answers about a recent C$17 billion ($12.6 billion) acquisition that wiped out about a fifth of its market value. Disgruntled shareholders will grill Cenovus at an annual meeting on Wednesday following results about its purchase of most of ConocoPhillips' Canadian oil and gas assets. The deal ramped up Cenovus debt and pushed it into the largely unknown territory of natural gas, effectively doubling the size of the Canadian oil company. Some investors have questioned whether Cenovus overpaid for the assets at a time when foreign oil majors are retreating from the high-cost and heavily regulated Canadian oil sands industry. "It's very much going to be a show-me story," said Mike O'Brien, managing director and head of the Core Canadian Equity team at TD Asset Management, a shareholder. While the deal's long-term logic is sound, it is still a question of whether the company can properly execute its plan, he said. Analysts expect Cenovus to post a loss of C$0.09 per share for the January-March quarter, compared with a C$0.14 per share loss a year ago, according to Thomson Reuters data. The company had higher-than-expected production for the first quarter and benefited from higher oil prices, Royal Bank of Canada analysts said. DIVERSIFICATION Apart from the debt taken to fund the ConocoPhillips deal, investors are concerned about Cenovus' move to diversify into natural gas with the purchase of Deep Basin assets and its ability to divest to pay for the assets. Benoit Gervais, portfolio manager at Mackenzie Investments, which owns Cenovus shares, said the company had no history or track record in conventional gas. "I estimate they've overpaid by about C$5 billion," he said. Cenovus shares fell 13.8 percent last month on news of the deal in their biggest ever single-day drop. The stock has since fallen another 5.6 percent. Buying Deep Basin flies in the face of the very identity of Cenovus, which was spun-off from predecessor Encana Corp to focus on crude, said one investor, who spoke on condition of anonymity as the person was not authorized to speak publicly on the issue. Still, the deal has some backers. Canada's oil-rich Alberta province, which holds a position in Cenovus through a government investment firm, said the company remained a good bet. Asked about investor concerns, a Cenovus spokesman referred to Chief Executive Brian Ferguson's comments this month that the company had a "solid plan" to finance the transaction and cut debt using increased cash flow and assets sales. Cenovus may sell parts of Deep Basin, RBC analysts said, a move that would please investors who balked at the purchase. While the transaction itself does not require a vote, some shareholders may use Wednesday's meeting to express opposition to the deal by voting against company nominations for the board of directors. Cenovus reports earnings the same week as other Canadian crude producers including Suncor Energy Inc, Crescent Point Energy Corp and Exxon Mobil Corp-owned Imperial Oil Ltd. (1 = 1.3486 Canadian dollars) (Editing by Denny Thomas and Andrew Hay)