Hello everyone, this is Tim Shufelt filling in for Chris Wilson-Smith the next couple of days. Today, we’re talking about the oil sands, where Canadian Natural Resources Ltd. has made a move that will allow the company to simultaneously increase production while raising cash payouts to shareholders. More on that below.
IN THE NEWS
- Toronto’s MaRS Discovery District has axed 19 positions, marking the second round of job cuts this year as part of an attempt to reset the innovation support organization’s business model under a new CEO.
- Canada’s largest securities watchdog has a new top enforcer. Bonnie Lysyk, former auditor-general of Ontario, started with the Ontario Securities Commission on Monday as executive vice-president of enforcement.
- Asset manager Global X Investments Canada Inc. is partnering with former BNN Bloomberg news anchor Jon Erlichman to launch a financial literacy YouTube channel that will help boost the company’s access to do-it-yourself investors.
Canadian Natural Resources is adding to its stake in a number of assets, including the Quest Carbon Capture and Storage facility in Fort Saskatchewan, Alta.TODD KOROL/Reuters
IN FOCUS
An Athabasca power play
The Canadian oil patch is not exactly in growth mode these days. After being targeted by the fossil fuel divestment movement, opponents of pipeline projects and frustrated shareholders alike, the industry parked its ambition and settled into a lower-profile status quo in recent years. Which makes Canadian Natural’s latest acquisition stand out. Let’s take a closer look.
What’s the deal?
The oil sands powerhouse said it is spending US$6.5-billion to acquire a number of oil and gas assets from Houston-based Chevron Corp. The assets include a 20-per-cent interest in the Athabasca Oil Sands Project (AOSP), as well as Chevron’s 70-per-cent stake in shale oil properties in the Duvernay region. Once the deal is complete, Canadian Natural will control 90 per cent of the AOSP, which includes a pair of open-pit mines near Fort McMurray, an upgrading facility near Fort Saskatchewan, and the Quest carbon capture and storage facility.
What is the upside?
For starters, the deal will boost Canadian Natural’s production by around 9 per cent in 2025. And since these are mostly assets that the company already majority owns, there isn’t much in the way of added operating expenses to worry about. In fact, Canadian Natural expects to save $40-million annually by combining contractors, increasing purchasing power, sharing equipment between sites and reducing the cost of transporting liquids, the company told analysts on Monday.
Why now?
This expansion comes at a time of relative austerity for the oil and gas sector in Canada. Gone are the days of rampant drilling and burning through cash to realize growth at all costs. Investors eventually pushed back against this model, forcing an era of financial responsibility on the sector. A global campaign of fossil fuel divestment and emissions reductions also stripped the oil patch of the kind of capital and political support that fuelled its rise. This latest news, however, appears to be a low-risk way for Canadian Natural to boost production. And with the Trans-Mountain pipeline expansion now in operation, there is easier access for that added output to get to market.
What does it mean for shareholders?
This new incarnation of the oil patch has been gushing cash. Prior to the deal, Canadian Natural had already cut its debt so much, that it was returning 100 per cent of its free cash flow to shareholders in the form of dividends and stock buybacks. That number will decline temporarily to 60 per cent while the company pays down the new debt it is taking on to finance the acquisition. But once you factor in oil prices in excess of US$70 a barrel, cash flow allocated to shareholders looking ahead should be roughly equivalent, on a total return basis, to what it was under the 100-per-cent policy prior to the acquisition. And once the company’s net debt falls to less than $12-billion, shareholders will, once again, get it all. In the meantime, quarterly dividends will also be hiked by 7 per cent, the company said on Monday. The market received the deal favourably, with Canadian Natural’s stock rising by 3.3 per cent on the day.
What about climate change?
This is the perennial question now dogging Canadian oil and gas producers with every move they make. As The Globe’s Andrew Willis writes, Canadian Natural’s lenders would only commit billions of dollars if they believed in company had a credible plan for reducing emissions. And Canadian Natural is a founding member of the Pathways Alliance, an industry group that claims it can realize net-zero greenhouse gas emissions by 2050 through carbon capture and storage and other technologies. A chorus of critics, on the other hand, say these claims are little more than greenwashing.
CHARTED
This is a reminder that earnings season is once again upon us, in case you have not yet festooned your eaves with garlands of dollar signs. A batch of financial statements are due from some U.S. banks later this week, kicking off the quarterly torrent of corporate results that will drive business headlines over the next six weeks.
Earnings are the main force sustaining the stock market over long periods of time. And Corporate America has been knocking it out of the park profit-wise since the turn of the millennium (save for that pesky global financial crisis). The question is, how much longer can earnings grow at this pace? As Ian McGugan tells us: “Much of the gains in after-tax earnings over the past couple of decades have been driven by falling interest rates, falling tax rates and falling union bargaining power. All those trends appear near their natural limits.”
MORNING MARKETS
Stocks in Europe and Asia lagged as investors were disappointed with the lack of details about China’s fiscal stimulus, while U.S. stock indexes pointed up, recovering after a selloff in the previous session.
TSX futures were negative as crude prices declined on waning Middle East fears, and fading optimism about China’s stimulus weighed on metal prices.
China’s CSI300 blue-chip index surged 10 per cent in early trade as the country’s markets reopened after a week-long holiday, but the index fell back and finished 5.9 per cent higher after the chairman of China’s economic planner provided little detail of fresh fiscal stimulus.
Hong Kong’s Hang Seng Index slumped 9.4 per cent, giving up some of the big gains it made during the Chinese holiday. Japan’s Nikkei was down 1 per cent.
The pan-European STOXX 600 was down 0.55 per cent in morning trading. Britain’s FTSE 100 lost 1.13 per cent, Germany’s DAX was down 0.26 per cent and France’s CAC 40 was also in the red, down 0.67 per cent.
The Canadian dollar traded at 73.31 U.S. cents.