Canadian Natural Resources Ltd. is buying the Alberta assets of U.S.-based Devon Energy Corp. for $3.8-billion as another foreign company exits Western Canada’s oil fields.
Devon Canada has the capacity to produce 128,000 barrels a day, including 108,000 b/d in the oil sands and 20,000 b/d of conventional heavy oil. Production this year is expected to average 122,800 b/d because of the curtailment ordered last December by the Alberta government due to insufficient export capacity and a glut of crude in the province that had driven prices to rock bottom levels.
Canadian Natural Resources (CNRL) said Wednesday that acquisition would immediately add to earnings per share and free cash flow, while the company expects to be able to gain further benefits by reducing capital and operating costs for the Devon assets, which abut its existing operations. Investors welcomed the deal, driving CNRL share price up nearly 4 per cent to $36.81 on Wednesday.
“The addition of these long-life, low-decline assets is an excellent fit” for CNRL, Steve Laut, the company’s executive vice-chairman, said on a conference call. With the addition of Devon, CNRL will have capacity to produce 1.2 million barrels of oil equivalent each day, making it Canada’s largest crude producer and on a scale of countries such as Colombia.
On a full-year basis, the acquisition would add 85 cents a share in free cash flow and 53 cents in earnings per share, he said. While CNRL will borrow $3.2-billion to finance the deal, the company said its debt levels relative to cash flow would remain strong.
Analysts said CNRL got a good deal from Devon, which in February signalled its intent to leave Canada and focus on the booming shale oil business in the United States. It appears CNRL was the sole bidder for the properties after companies such Suncor Energy Inc., Cenovus Energy Inc. and Husky Energy Inc. abstained for different reasons. J.P. Morgan Securities LLC and Goldman Sachs Group Inc. advised Devon, while TD Securities Inc. acted for CNRL.
“There were very limited buyers right now,” Travis Wood, Calgary-based analyst at National Bank Financial, said. “I think the price is fair; I don’t think it is a steal by any means. … It’s a good deal, but I don’t think it is a steal.”
Devon is the latest foreign company to either exit or dramatically scale back exposure to the Canadian oil sands in order to focus on U.S. shale plays or other international assets. They include Royal Dutch Shell PLC, France’s Total SA, Norway’s Equinor ASA and U.S.-based giant ConocoPhillips Co.
In 2020, the oil sands will produce 3.3 million b/d on average and just four companies – Suncor, CNRL, Cenovus and Imperial Oil Ltd. – will account for 85 per cent of that volume, Stephen Kallir, senior analyst at Wood Mackenzie, said in a note.
Analyst Phil Skolnick of Eight Capital agreed the Devon assets represent a good fit for CNRL, also known by its stock symbol, CNQ.
“It was largely anticipated by the market that CNQ would be the buyer, and we don’t expect much of an impact on its near-term relative share price performance,” Mr. Skolnick said in a note. "The transaction makes sense, as it doesn’t impact CNQ’s balance sheet much.”
Alberta Energy Minister Sonya Savage said the decision by Devon to exit Canada underscores the oil industry’s challenges in the province, especially the lack of pipeline export capacity and proposed regulatory changes from Ottawa.
“Part of the reason why we won such a strong mandate in the provincial election is because investors have been pulling out of the province of Alberta because of government regulations,” she said. “We’re improving that. We’re sending a strong sign we’re open for business; we want that investment to come back.”
Ms. Savage announced the province is spending $1.6-million on an advertising campaign in Ottawa to support the Trans Mountain pipeline expansion project. The Liberal government is due to decide by June 18 on whether to reapprove the project, and Ms. Savage acknowledged the federal government is expected to do so.
“We can’t take any chances,” she said. “We’re optimistic and hopeful that the government won’t delay, but if they delay, we could lose an entire construction season and that’s going to have an unbelievable detrimental impact on Alberta.”
Ms. Savage was in Ottawa to lobby senators to kill a government bill that would ban oil tankers from using ports in Northern British Columbia for export. She also is urging the senators to accept the full package of industry-friendly amendments adopted by a Senate committee on the government’s Bill C-69, which overhauls environmental assessment of resource projects.
With a report from Andrew Willis