Cenovus Energy Inc has agreed to buy rival Husky Energy Inc controlled by Li Ka-shing's Hutchison Whampoa in an all-stock deal valued at C$3.8 billion (US$2.9 billion) to create Canada's No 3 oil and gas producer as a pandemic-driven demand collapse and weak oil prices force the industry to consolidate, Reuters reports.

The deal, announced on Sunday, is the largest in the Canadian energy sector since the start of the pandemic, and follows recent big deals in the United States.

Concho Resources Inc agreed this month to being taken over by ConocoPhillips for US$9.7 billion. That followed Chevron Corp's US$4.2 billion purchase of Noble Energy.

Canadian companies have been under stress for six years, dating back to the last downturn, due to congested pipelines and the flight by foreign oil companies and investors due to Canada’s high production costs and emissions.

The deal makes Cenovus an integrated producer with refineries in Canada and the United States, adding to their existing half-ownerships in two U.S. refineries.

Refineries have suffered during the pandemic as travel restrictions hammered demand for jet fuel and gasoline, but in more normal times they can provide a hedge for oil producers when crude prices are low.

“The diverse portfolio will enable us to deliver stable cash flow through price cycles...,” Alex Pourbaix, Cenovus President and Chief Executive Officer said.

After the deal closes, Cenvous shareholders would own 61 percent of the combined entity, with Husky shareholders controling the rest.

Li Ka-shing-controlled Hutchison Whampoa would hold a 15.7 percent stake in new company. Hutchison Whampoa is the biggest shareholder of Husky currently, with 40.2 percent stake.

Cenovus’ deal for Husky is valued at C$23.6 billion, including debt, the companies said in a joint statement.

Cenovus said the deal would create Canada's third-largest producer based on total company output behind Canadian Natural Resources and Suncor Energy.

Husky shareholders will receive 0.7845 of a Cenovus share and 0.0651 of a Cenovus share purchase warrant in exchange for each Husky common share, according to the statement. Husky’s market value stood at C$3.2 billion as of Friday’s close, which implies Cenovus is offering a 19.5 percent premium through the all-stock deal.

The combined company is expected to generate annual synergies of C$1.2 billion and will operate as Cenovus Energy Inc with headquarters in Alberta, Canada, the statement said.

Cenovus Chief Executive Pourbaix will serve as chief executive of the merged company with Jeff Hart, currently Husky’s finance chief, becoming chief financial officer.

Cenovus said the combined company will be able to produce 750,000 barrels of oil equivalent per day.

The transaction has been unanimously approved by the boards of directors of Cenovus and Husky and is expected to close in the first quarter of 2021, the companies said.

RBC Capital Markets and TD Securities are acting as financial advisors to Cenovus, while Goldman Sachs Canada and CIBC Capital Markets are acting as financial advisers to Husky.

Cenvous shareholders would own 61 percent of the combined entity. Li Ka-shing-controled Hutchison Whampoa would hold a 15.7 percent stake in new company.

Cenovus Energy to buy CK Hutchison's Husky Energy in US$2.9b deal