Deal to put CNRL in exclusive company

Joining world’s 1-million BPD club

Emerging as a bona fide Canadian oil powerhouse, Canadian Natural Resources Ltd's blockbuster $12.7 billion deal on Wednesday has propelled the company into the exclusive club of listed global companies that pump out more than a million barrels of every day.

The Calgary-based operator's 70 per cent stake in Royal Dutch Shell Plc. and Marathon Oil Corp.'s oilsands assets will make it one of only 17 public companies in the world that produce more than 1 million barrels of oil equivalent per day, if the deal is finalized.

“The transaction will push CNQ (the company's stock symbol) above the million boe per day threshold, which will make it the first Canadian E&P company to reach that mark,” said energy investment broker Peters & Co. in a note.

The list excludes stateowned companies such as Saudi Arabian Oil Company (Aramco), Abu Dhabi National Oil Company, Nigeria National Oil Company and Kuwait National Oil Company, among others, that produce well over a million barrels per day.

CNQ's acquisition of Royal Dutch Shell Plc. Athabasco Oil Sands Project and Marathon Oil Corp.'s assets will see its output surge to around 1.07 million barrels of oil equivalent per day — nearly equivalent to that of Algeria — from 870,139 bpoed recorded at the end of last year.

Peters notes that CNQ's massive bet on Shell's oilsands assets is “one of the better deals of the cycles,” which will set up the company for the next decade. The company will take over operations of the Jackpine and Muskeg River mines, where it will hold a 70 per cent interest, although Shell will remain operator of the Scotford upgrader.

Even before the deal, Peters had rated CNQ as a company with the highest free cash flow among its peers, which include U.S. firms, and this deal places it even higher among its rivals.

“With the strong shareprice performance following the deal announcement combined with the accretion numbers… we have CNQ screening as one of the best stocks,” Peters analysts wrote, raising their target price to $53 per share from its earlier target of $50.

CNQ’s share price closed Friday at $43.38 after gaining nearly 10 per cent on Wednesday, the day of the announcement.

RBC Capital Markets also has a ‘top pick’ recommendation on CNQ after boosting its one-year target price to US$60 per share.

“Even if the synergies afforded by its AOSP deal are only moderate in form of lower operating costs… the price CNQ paid is a steal in our eyes,” analyst Greg Pardy said in a note, noting that he would not be surprised to see CNQ taking over Shell’s remaining 30-per-cent stake in the Scotford upgrader within the next few years.

The company acquired Shell’s stake at a cost of $61,000 bpd, or 60 per cent of the construction cost at Horizon of $102,000 bpd, Pardy wrote.

However, another RBC analyst, Matthew Kolodzie, lowered the company’s credit rating to ‘sector perform’, as he believes the 70-per-cent debt-financed acquisition will weaken the firm’s credit profile. “We like the assets to be acquired, but would prefer less leverage,” said Kolodzie. “We were a little surprised by the transaction.”

While the deal seems astute for now, analysts will likely have a rethink if oil prices collapse once again for an extended period and a new wave of environmental policies further constrains oilsands production.

The deal is expected to close in the second quarter.