Cenovus Energy has agreed to buy rival Husky Energy in an all-stock deal valued at $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.

The deal, announced Sunday, follows recent big deals in the United States. Concho Resources agreed this month to being taken over by ConocoPhillips for $9.7 billion. That followed Chevron Corp's $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.

Consolidation makes the Canadian industry leaner and lowers costs, said Jackie Forrest, executive director at the ARC Energy Research Institute, adding that deal-making is likely just getting started.

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.

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The Husky refinery in Superior is in the midst of a $750 million rebuild after it was badly damaged by an explosion and fire in April 2018 that injured 36 people and led to the evacuation of much of the city, largely fueled by the fear of a potential release of hydrogen fluoride. None of the facility's supply of the toxic gas was found to have escaped..

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.

Hong Kong tycoon

After the deal closes, Cenovus shareholders would own 61% of the combined entity, with Husky shareholders controlling the rest. Hong Kong tycoon Li Ka-shing-controlled Hutchison Whampoa would hold a 15.7% stake in the new company. Hutchison Whampoa is the biggest shareholder of Husky currently, with a 40.2% stake.

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

The deal is the biggest oil and gas industry M&A in nearly four years, based on enterprise value, said Tom Pavic, president of Sayer Energy Advisors, which advises on M&A. The most recent larger deals happened in the first quarter of 2017, when Cenovus bought ConocoPhillips assets and Canadian Natural purchased assets from Shell and Marathon Oil.

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

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% premium through the all-stock deal.

Cenovus and Husky shares have lost 63% and 70% respectively this year, exceeding the Toronto energy index loss of 53%.

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 CEO 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 advisors to Husky.

The Duluth News Tribune contributed to this report.