Shell’s CNRL sale seen as a boon to investors
CALGARY Royal Dutch Shell Plc’s move to sell its eight-per-cent stake in Canadian Natural Resources Ltd. presents a buying opportunity for investors, analysts say.
Shell announced late Monday it would sell its 97.6 million shares in a US$3.3-billion deal underwritten by Goldman Sachs & Co., RBC Capital Markets, Scotiabank and TD Securities.
While the sale had been expected, Shell was the largest shareholder in Canadian Natural and the deal sent shares in the Calgary-based oil major down four per cent early in the day before recovering somewhat. They ended the day at $44.43, down two per cent. That is roughly in line with the three- per-cent discount Shell accepted for its shares.
Shell had acquired the shares as part of a $12.7-billion deal to sell its oilsands portfolio to Canadian Natural in 2016, at the height of the oil price downturn. The deal propelled Canadian Natural ahead of rivals and transformed it into the largest upstream oil and gas producer in Canada, with total production exceeding one million barrels of oil equivalent per day.
Given that the discount was relatively small, Eric Nuttall, partner and senior portfolio manager at Ninepoint Partners, said he didn’t expect the nearly 100 million shares to flood the open market. “If it was a 10-per-cent discount, you’re going to have people looking to flip it for five per cent (upside),” he said, but a three-per-cent discount suggests “you’re looking at longer-term investors rather than short-term hedges.”
Since the deal was widely expected, larger investors had previously made large expressions of interest, so investors are unlikely to flip the stock, Nuttall added.
Similarly, Canoe Financial director and senior portfolio manager Rafi Tahmazian said bought deals like the one announced Tuesday are better than marketed deals as it reduces volatility.
“We think the sale comes while energy is still in the early stages of the life cycle, so it’s good timing for investors with a longer term outlook,” he said.
Other analysts were also positive on Canadian Natural and many encouraged investors to buy.
GMP FirstEnergy analyst Michael Dunn said the deal was “negative today; positive going forward.” He has a $57 per share price target on the stock.
“You get basically the biggest and the best oil company in Canada,” GMP First Energy analyst Michael Dunn said Tuesday as the stock was tumbling.
“Of companies of a similar size, they are uniquely positioned to have very low sustaining capital costs for the next 20 years, relative to their cash flow,” Dunn said. “Arguably, Imperial Oil is in that category too, but the valuation for CNRL is just more attractive.”
In a note, Dunn said he expected some portfolio managers to sell their positions in other oil and gas companies and buy Canadian Natural at a discount. As many as 24 analysts have a buy rating on the stock, while the remaining five have a hold rating, Bloomberg data shows.
For its part, Shell had previously indicated it would eventually sell the shares, and analysts believe the timing of the deal to sell the shares now made sense in the context of rising oil prices.
“A deal this size, you don’t want to consummate in the summer when investor interest is kind of at its low,” Raymond James analyst Chris Cox said. “This means that the company, if it was going to sell this year, you either need to sell it now or risk waiting until the second half of the year.”
Cox, who has a $60 per share price target on Canadian Natural stock, said the resultant drop in the Calgary-based producer’s shares made the stock more attractive.
It also gives Shell more cash as the company gets closer to making a decision to build a massively expensive LNG project on Canada’s West Coast, he said.
“I wouldn’t say it’s a tablepounding opportunity but I like (Canadian Natural) more today than I did yesterday,” Cox said, adding the deal is also “indicative of Shell adding a little dry powder for LNG Canada sanctioning later this year.”
Shell indicated in a release it would use the proceeds to reduce its net debt.