Oilsands giant Canadian Natural inks $3.8B deal for Devon assets

One of Canada's largest oilsands producers is getting bigger in a $3.78-billion buyout that hastens the exit from the sector of yet another major foreign-owned rival.

Calgary-based Canadian Natural Resources Ltd. announced Wednesday it is buying the northern Alberta oilsands and heavy oil operations that Oklahoma City-based Devon Energy Corp. put on the block in February.

Canadian Natural shares fell in early trading in Toronto, but rebounded as analysts rated the price of about $29,400 per flowing barrel of daily production attractive for the buyer in comparison with other recent deals.

"The transaction ... is a win-win deal for both Devon and Canadian Natural," said Steve Laut, CNRL's executive vice-chairman, on a conference call with analysts.

"(It gives) Devon the ability to achieve its objective of exiting Canada and Canadian Natural the opportunity to leverage our economies of scale, our technical and operating expertise and capture significant synergies to add incremental value from these very high-quality assets."

The Devon assets represent the "textbook definition of excellent fit," Laut said, adding his company has already identified $135 million in synergistic annual cost savings it aims to achieve by the end of the year.

What was a little surprising is the purchase price.- Jennifer Rowland, analyst with Edward Jones

On a map in a website presentation, Devon's 108,200-barrel-per-day Jackfish oilsands project south of Fort McMurray is shown adjacent to Canadian Natural's Kirby North and Kirby South projects.

All produce raw bitumen crude using steam-assisted gravity drainage technology, where steam is injected into a horizontal well to melt the heavy sticky oil and allow it to drip into a parallel well to be pumped to surface.

Another map shows Devon's conventional heavy oil properties, which produce about 20,100 bpd, farther to the south and surrounded by Canadian Natural lands.

Devon's production is currently restricted to about 122,800 bpd because of Alberta government production curtailments.

'Clean and timely exit from Canada'

"This transaction creates value for our shareholders by achieving a clean and timely exit from Canada, while accelerating efforts to focus exclusively on our high-return U.S. oil portfolio," Devon chief executive Dave Hager said in a statement on Wednesday.

Jennifer Rowland, an analyst with Edward Jones in St. Louis, said Canadian Natural struck a "good deal" in acquiring the assets, adding she thought they'd have fetched 20 to 25 per cent more.

"What was a little bit surprising is the purchase price," she said. "Not having ... a big pool of buyers helped as far as [Canadian Natural's] ability to negotiate the transaction."

Wednesday's deal is Canadian Natural's seventh major acquisition since 2014, when it struck a $3.12-billion agreement to buy most of Devon's non-heavy oil Canadian assets, according to a report from Wood Mackenzie.

"This continues the trend of Canadian-domiciled consolidation that we've seen since 2016," said analyst Stephen Kallir.

"In 2020, the oilsands will produce 3.3 million bpd and just four companies now account for 85 per cent of that volume."

Largest producer in Canada

Wood Mackenzie points out Canadian Natural stands to be the largest producer in Canada with 1.2 million barrels of oil equivalent per day when the latest Devon deal closes.

That would make it the 25th largest producer in the world and eighth largest if you don't include companies owned by government.

The exit of Devon from the oilsands follows recent Canadian oilsands asset sales by foreign companies including Norway's Statoil, France's Total SA, Arkansas-based Murphy Oil and Houston-based ConocoPhillips.

Kallir said Wednesday's announcement follows a long-running trend of consolidation in Alberta's oilsands, describing it as a natural progression of the business cycle.

"While there is certainly negative investor sentiment around the oilsands right now, I think specifically looking at this from the perspective of CNRL, we are coming into a time that, hopefully, we're going to see quite a few positive catalysts," he said.

For instance, he said, there's hope the federal government will give the go-ahead to the Trans Mountain pipeline expansion next month and that Enbridge's Line 3 pipeline project will be completed in 2020.

Deal to close next month

The deal between Canadian Natural and Devon is expected to close by June 27, but its effective date is Jan. 1, 2019. The accumulated cash flow from the first half of the year means Canadian Natural will have to borrow only $3.25 billion in a three-year term loan to finance the deal, said chief financial officer Mark Stainthorpe.

The company expects to be able to continue to maintain its dividend and share buyback programs and its balance sheet will continue to strengthen despite the new debt, he added.

Canadian Natural is moving about 14,000 bpd of oil on railcars and is looking at adding more, but the Devon production comes with sufficient market access, said president Tim McKay.

Canadian Natural says it will add about 735 new employees from Devon, including both field and head office personnel.

The company said the deal includes 607,000 hectares of land, of which 405,000 hectares are undeveloped. The lands contain proved reserves of about 730 million barrels of oil.

By year-end, Canadian Natural's production mix is expected to be 250,000 bpd of thermal oil, 450,000 bpd of oilsands mining and upgrading, 150,000 bpd of conventional light crude oil and natural gas liquids, 120,000 bpd of heavy crude oil and 220,000 barrels of oil equivalent per day of natural gas.

The transaction, which is subject to normal closing conditions and regulatory approvals, is expected to close June 27.