Canadian Natural (CNQ) Ups Oilsands Game With C$3.8B Buyout

In a bid to further solidify its position on its home turf, Canadian Natural Resources Limited (TSX:CNQ) recently inked a mega deal of C$3.8 billion to snap up Devon Energy Corporation’s (NYSE:DVN) Canadian business. The pact represents Canadian Natural’s biggest buyout since 2017, when it acquired Shell’s RDS.A oilsands assets for C$8.16 billion.

Markedly, Canadian Natural — the largest energy producer in terms of volume in Canada and eighth largest explorer (excluding national oil companies) in the world — will boost output capacity to 1.2 million barrels of oil equivalent per day (Mboe/d) with this latest deal with Devon. This deal is a win-win for both the firms, with shares of Canadian Natural and Devon up 3.73% and 0.94%, respectively, post the announcement of the agreement.

Per the deal, Canadian Natural will acquire Devon’s Jackfish oilsands project, heavy oil wells and undeveloped lands. Notably, the acquired assets netted 113,000 barrels of oil equivalent to Devon in the first quarter of 2019. The proved reserves associated with the holdings amounted to 409 million barrels of oil in 2018.

Canadian Natural will borrow C$3.25-billion term loan to fund the deal and the rest will be financed via free cash flows of the firm. Subject to satisfactory closing conditions and regulatory approvals, the deal is set for closure on Jun 27.

Devon’s Strategic Sell Off to Streamline Portfolio

As we know, Devon already stated its intentions to exit Canadian operations (struggling with low oil prices and high costs) earlier this year in February. Pipeline construction in Canada has failed to keep pace with rising domestic oil, forcing producers to sell their products at a discounted rate. Pipeline pinch sent Canadian crude prices spiraling downward in 2018, which prompted the Alberta government to mandate production cuts. Reportedly, infrastructural bottlenecks are likely to lead to lost revenues of C$15.8 billion in 2018.

Consequently, Devon’s move to vend Canadian assets seems to be a prudent one. Devon will utilize the proceeds from the transaction to trim debt and deepen focus on high-return U.S. shale plays. It is hiving off non-core Barnett Shale gas properties in Texas by the end of the year.

Canadian Natural’s Opportunistic Purchase is an Excellent Fit

Canadian Natural got hold of Devon’s assets at a much lesser price than what most of the energy pundits predicted, considering there weren’t many buyers of the holdings. While international energy explorers are anyway focusing on U.S. shale plays, most of the Canadian companies are not very keen on acquiring new stakes in oilsands projects amid ongoing crisis in the Canadian energy industry. While Suncor Energy had already signaled its disinterest in making further investments in the country until the pipeline crisis gets resolved, Cenovus Energy (CVE) is yet to recover from its $17.7-billion acquisition deal of ConocoPhillips’s oilsands properties.

Meanwhile, Canadian Natural has an impressive history of acquiring assets that are an excellent fit to the company. Apart from taking over Shell’s oilsands holdings in Canada, the firm also snapped up Canadian holdings of Marathon Oil (NYSE:MRO), Anadarko Petroleum (NYSE:APC) Corporation and BP plc (LON:BP).

The Devon assets buyout will increase crude production capacity of Canadian Natural by 128,000 barrels a day, that too at a discounted price, enabling the firm to compete more strongly with Suncor (NYSE:SU) , which currently holds the leading position in the Canadian oilsands market.

Devon's Jackfish oilsands project is adjacent to Canadian Natural's Kirby North/South projects. The complementary asset base has been the primary driver of the deal. With Devon’s assets being within Canadian Natural’s core production areas, it provides the latter with increased economies of scale and synergy benefits of C$135 million on an annualized basis. As Devon’s assets fit well with Canadian Natural’s land base, it will help the Zacks Rank #2 (Buy) company to squeeze down costs while boosting output. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Amid the Canadian crisis, various energy biggies like Shell (LON:RDSa), Statoil (OL:EQNR), TOTAL SA and Conoco Phillips, among others, have jettisoned stakes in their Canadian properties. The latest deal leads to continuation of the trend of offloading stakes by foreign companies in Canadian oilsands, which are grappling with the notorious reputation of being eco unfriendly and suffering from pipeline shortage and huge costs.

With most of the international energy players exiting the Canadian energy market, majority of Canada’s oilsands assets are concentrated in the hands of very few Canadian energy majors. In fact, Imperial Oil, Suncor, Cenovus and Canadian Natural will account for three-fourths of the total oilsands output by next year.

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