How shrewd dealmaking transformed Canadian Natural into one of the world’s biggest oil firms

CALGARY – For what most analysts believe was a bargain, Canadian Natural Resources Ltd. solidified its position in the oilsands and as the country’s largest oil and gas producer with a $3.8-billion deal for Devon Energy Corp.’s Canadian business Wednesday.

CNRL announced the deal for Oklahoma City-based Devon’s Jackfish oilsands project, heavy oil wells and undeveloped lands Wednesday morning in a move that will boost the Calgary-based oil giant’s total production from 1 million to 1.2 million barrels of oil equivalent per day this year.

“The acquired assets are in Canadian Natural’s backyard,” the company’s executive vice-chairman Steve Laut said on an investor call, adding the purchase price is “significantly below” the cost to build the facilities from scratch.

Indeed, analysts widely expected the assets to sell for a higher price, with some estimates as high as $9 billion but most in the $5 billion to $6 billion range.

“Much as we expected, if CNRL was going to be the ultimate acquirer, we expected the company to be highly price sensitive/disciplined and we believe that is seen in the ultimate purchase price,” CIBC World Markets analyst Jon Morrison wrote in a note. He had previously said the assets would sell for between $3.5 billion and $5.5 billion.

Canadian Natural shares jumped 3.8 per cent to $36.60 per share, while Devon Energy was up a third of a per cent to US$26.70 per share.

Pipes carry recovered bitumen from Devon Energy Corp.’s 35,000 barrel per day Jackfish Projects processing plant near Conklin, Alberta. Jimmy Jeong/Bloomberg

CNRL is already the largest oil and gas company in the country by volume and among the major oil producers that are not owned by governments, according to Wood Mackenzie.

“The company is also the 25th largest producer in the world,” according to Stephen Kallir, senior analyst at Wood Mackenzie. “When you remove national oil corporations, it is the eighth largest, behind only the Majors and ConocoPhillips. In comparison, Devon will drop from 49th to 56th.”

Exxon Mobil Inc., Royal Dutch Shell Plc., BP Plc, Chevron Inc., Total SA, Equinor ASA, Eni SpA are considered oil majors, distinct from state-owned enterprises such as Saudi Aramco and China Petroleum & Chemical Corporation, or Sinopec.

Canadian Natural has also been “the most acquisitive” large Canadian oil company and could continue to strike more deals, said New York-based Eight Capital analyst Phil Skolnick.

“This is a company that historically does a really good job of taking assets out of another company’s hands that might not be such a good fit there and then squeezing those costs down,” said Phil Skolnick, an analyst with Eight Capital based in New York.

When CNRL bought Shell Canada Ltd.’s oilsands business for $12.7 billion in 2017, the company created one management team for its own Horizon oilsands mine and Shell’s Athabasca oilsands mines, Skolnick said, noting he expects CNRL will do the same thing with Devon’s assets.

This is a company that historically does a really good job of taking assets out of another company’s hands … and then squeezing those costs down

Phil Skolnick, analyst

Analysts quizzed CNRL management on Wednesday’s investor call how they got the properties at such a low valuation — 60 per cent less on a per-barrel basis than they paid for Shell’s assets two years ago.

Company president Tim McKay offered that the Shell assets included an oilsands upgrader and produce light, synthetic crude oil rather than heavy oil, which the Devon assets produce. He also said, “It was a different time that transaction was done.”

Since that time, Canadian oil production has surpassed export pipeline capacity and heavy oil prices in the country have fallen sharply. They continue to be exposed to large discounts relative to international benchmarks like West Texas Intermediate.

Western Canada Select heavy oil traded for an average of US$42.23 per barrel Tuesday, which is US$15.41 per barrel lower than WTI prices, which averaged US$57.64 per barrel.

Eight Capital’s Skolnick said that given CNRL’s now increased exposure to more heavy oil, the company will look to purchase the government of Alberta’s oil-by-rail contracts to move some of Devon’s production out of the country.

And with fewer international companies competing in the space, oilsands operating costs could drop further, Skolnick said.

Husky Energy Inc. president and CEO Rob Peabody told investors Tuesday that the concentration of assets in the hands of a few large Calgary-based companies in the oilsands has resulted in a “lower competitive intensity” in the play, which had driven down costs.

“The sale of Canada is an important step in executing Devon’s transformation to a U.S. oil growth business,” Devon president and CEO David Hager said in a release Wednesday.

In selling out of the oilsands, Devon joins Shell, Norway’s Statoil, France’s Total SA, Arkansas-based Murphy Oil and Houston-based ConocoPhillips in selling either all or parts of their oilsands holdings to Canadian players.

Including Wednesday’s deal, Canadian companies have now spent $37.4 billion consolidating their positions in the oilsands in recent years and buying foreign companies out of the play.

“You’ve got the majority of Canadian oilsands assets in the hands of very few large Canadian oil companies,” said Jennifer Rowland, an analyst with Edward Jones in St. Louis.

She said CNRL likely got the Devon assets for 25 per cent less than most analysts expected because there are fewer buyers for oilsands assets.

Suncor Energy Inc. had signalled it wasn’t in talks to buy the assets earlier this month, while Cenovus Energy Inc. is still digesting its $17.7-billion acquisition of ConocoPhillips’ oilsands assets in 2017.

This left just a few potential buyers Devon could market the assets to.

“The shuffling of assets is over at this point. The only other one out there right now would be MEG Energy Corp.,” Rowland said, noting that Husky had tried to acquire MEG in a hostile takeover in 2018 but ultimately abandoned the transaction.

She added that there were smaller transactions that could be done in the oilsands — like purchasing minority working interests in existing projects — but the largest and most expensive assets in the formation have already changed hands.

“There are small pieces here and there. Nothing of the dollar and magnitude that we’ve seen in these transactions,” she said.

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