In a show of confidence for returns on oil and gas, the Ontario Teachers’ Pension Plan has agreed to buy millions of royalty and mineral interests for gross proceeds of US$2.65 billion (C$3.3 billion).

Oil company Cenovus Energy Inc. (CVE), a spinoff of Encana Corp. (ECA), said June 30 it will sell subsidiary Heritage Royalty LP’s 4.8 million gross acres of royalty interest and mineral fee title lands in Alberta, Saskatchewan and Manitoba.

Heritage owns one of the largest packages of fee titles in Canada, though oil and natural gas prices have suffered during the downturn.

Royalty property cash flows are linked to the price of oil and natural gas. The Teachers' Pension said its investment portfolio helps to diversify benefits and a hedge against unexpected inflation.

Ziad Hindo, senior vice president for the pension’s Natural Resources Group (NRG) and asset allocation, said Heritage has strong assets and an operating partner that fit with the need to pay pensions long term.

“This acquisition provides an attractive risk-return valuation and complements our investment approach, which is shifting to more direct and diversified energy sector holdings," Hindo said.

Heritage’s 40 employees will be transferred as part of the deal.

Heritage, based in Calgary, also holds gross overriding royalties on 0.5 million acres at Cenovus' Pelican Lake and Weyburn properties, two large-scale, long-life oil projects. In 2014, HRP had revenues of about US$257 million (C$320 million) based on average production of 14,800 barrels of oil equivalent per day (boe/d).

Brian Ferguson, Cenovus president and CEO, said its royalty deal will capture value for shareholders not reflected in its share price.

In 2009, Cenovus split from gas-oriented Encana Corp. and began independent operations. The company also owns refineries in Illinois and Texas. In 2014, Encana spent more than US$10 billion to return to liquids, buying holdings in the Eagle Ford and Permian Basin.

“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,” he said.

Cenovus sold Heritage following a rigorous marketing process that attracted significant interest. Heritage had also considered an IPO.

Teachers' created NRG in 2013 to combine management of commodity derivatives plus physical assets including timberland, agriculture and oil and gas. Its portfolio includes a working interest in the Weyburn property operated by Cenovus that is recognized as the world's largest geological CO2 storage project.

The Teachers’ pension holds US$124.2 billion (C$154.5 billion) in net assets as of December 2014 and is Canada’s largest single-profession pension plan in Canada. It has earned a 10.2% annualized rate of return since its founding in 1990.

In 2014, Cenovus’ revenues were US$16.2 billion (C$20.1 billion) in 2014. Production consisted of 203,000 boe/d of NGL and oil and 488 million cubic feet per day of gas.

TD Securities Inc. acted as Cenovus' exclusive financial adviser throughout the sales process. The effective date of the transaction is April 1, and it is expected to close by the end of July.

Contact the author, Darren Barbee, at dbarbee@hartenergy.com.

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