Tim McKay says conditions right for consolidation as Canadian Natural reports $408M profit

Conditions are right for more merger and acquisition activity in the Canadian oil and gas sector, says the president of Canadian Natural Resources Ltd.

On a conference call to discuss third-quarter results on Thursday, Tim McKay said the industry has reached a point in the business cycle where haves and have-nots are more clearly visible and that allows more deals to be completed.

"Obviously, there's some very healthy companies and there's some companies that aren't so healthy … through the consolidation thing, there are opportunities to improve your operations both on capital and G & A (general and administrative) and such," he said.

"I think on a broader basis there will continue to be some consolidation here over the next year."

The comments came the morning after Calgary rival Tourmaline Oil Corp. announced a deal to purchase two private oil and gas companies for a total of about $526 million in cash and shares, a move expected to solidify its position as Canada's largest natural gas producer.

Tourmaline shares rose by as much as $1.70, or 9.8 per cent, to $18.92 in Toronto on Thursday.

Increased investment after takeover

Canadian Natural, a former top gas producer, said Thursday it is already ramping up investment in drilling on gas-and-liquids producing assets it obtained through its $111-million cash takeover of Calgary-based Painted Pony Energy Ltd., which closed in early October.

"We remain on track to add 35 million cubic feet per day of natural gas volumes annually," said McKay, noting that forward strip prices have prompted the company best known for its oilsands operations to redirect capital funding to gas drilling after years of neglect.

Canadian Natural considers gas output a hedge against costs in its oilsands operations, which consume large amounts of the fuel. It is targeting production of 1.6 billion cf/d in the current quarter.

Curtailment to end

The Alberta government announced recently it will end its oil production curtailment program in December, prompting some analysts to predict wider price discounts for Alberta crude as more barrels come back into the market.

But McKay said on the call that while he expects overall production to increase over the winter, spikes in price discounts will likely be "short-term blips," provided that export pipelines are able to operate without interruption and given the current relatively low oil storage levels.

Canadian Natural reported a third-quarter profit of $408 million, down from nearly $1.03 billion in the same quarter last year due to lower oil prices, but up from a loss of $310 million in the second quarter when oil prices plunged due to effects of the COVID-19 pandemic.

On an adjusted basis, earnings from operations were $135 million for the quarter, down from $1.23 billion in the same quarter last year but well ahead of an adjusted loss of $772 million in the second quarter.

Production

Overall production in the third quarter was 1.11 million barrels of oil equivalent per day as the company completed maintenance at its oilsands mining operations, down from 1.176 million boe/d in the third quarter of 2019 and 1.165 million boe/d in the second quarter of 2020.

In reports, analysts said Canadian Natural beat expectations on cash flow and met forecasts for production.

"Earlier in the year, CNQ was under pressure to cut its dividend," said Credit Suisse analyst Manav Gupta.

"However, management remained very confident in its ability to generate sufficient cash to fully cover the dividend. We believe today's results will prove that management was right."

Canadian Natural shares rose by as much as 37 cents, or 1.6 per cent, to $22.58 in Toronto on Thursday.