Canadian Natural buys Devon assets
Gas prices ‘not the driver’ of $3.1B deal
CALGARY — The cold winter price boost being enjoyed by natural gas producers provides a short-term bonus for Canadian Natural Resources Ltd. in a $3.125-billion deal announced Wednesday for most of Devon Energy Corp.’s Canadian conventional assets.
But president Steve Laut said that’s not why the Calgary-based major jumped into action when Oklahoma City-based Devon signalled its strategic plan to sell in December.
Current production of 86,600 barrels of oil equivalent per day is 80 per cent natural gas, a commodity that has enjoyed a rebound from less-than-profitable pricing as surging North American demand reduced storage levels this winter.
“(In) 2014 and potentially into 2015, it looks like pretty strong gas pricing and that helps the metrics of this deal,” Laut conceded on a conference call with analysts.
“But that’s not the driver of this deal. It’s the assets themselves, and our ability to integrate those assets, achieve operating costs … and just develop some of the light oil properties and liquids-rich natural gas that are on these properties that drive the acquisition.”
Analysts applauded the deal and so did investors, with shares in both Devon and Canadian Natural jumping higher.
The former rose by as much as 4.4 per cent to $65.64 and the latter by as much as 5.7 per cent to $41.42.
Devon closed at $64.25, up $1.34 and Canadian Natural at $40.63, a 52-week high, up $1.45 on the day and 43 per cent from its 52-week low of $28.44 set in June.
The deal will cut in half the amount of production Devon gets from its Canadian branch.
The assets it is keeping, its Jackfish thermal oilsands project (58,000 barrels per day) and Lloydminster heavy oil acreage, plus its early stage northeastern B.C. Horn River shale gas play, produced 84,500 boe/d in the fourth quarter of 2013.
The assets it is selling are scattered throughout B.C., Alberta and Saskatchewan and include hot plays such as the Montney and Cardium. The deal includes about one million net hectares of royalty and fee simple lands and 880,000 net hectares of undeveloped land, plus six gas plants and four oil batteries.
There are proved reserves of 272 million boe, about 70 per cent gas, 15 per cent oil and 15 per cent natural gas liquids.
“Devon had an operating strategy similar to Canadian Natural and preferred to own and operate key infrastructure,” pointed out Lyle Stevens, executive vice-president of Canadian conventional operations, on the call, noting several operations the companies shared as partners.
He said an overlapping map shows how much the two companies have in common, especially in the Alberta Deep Basin, Peace River Arch and northeastern B.C.
Laut said the deal is expected to boost Canadian Natural’s cash flow by more than $650 million to $10 billion to $10.4 billion this year, adding that synergies are expected to eventually shave $50 million to $70 million per year in administrative costs and $65 million and $75 million in operating costs.
About 900 Devon Canada employees from the field and the Calgary head office are to join Canadian Natural.
Laut said Canadian Natural will combine Devon’s royalty generating lands with its own with the option of selling it. Devon’s properties generate about $75 million a year and the combination would produce $140 million to $150 million per year.
Devon said in a news release it will repatriate the proceeds upon closing to the U.S. to repay debt incurred to finance its Eagle Ford acquisition. Net proceeds are expected to be $2.7 billion US after currency exchange and taxes.
“This agreement represents a significant step forward in the execution of our non-core divestiture process,” said John Richels, Devon president and chief executive.
“We believe the sale makes strategic sense for both companies,” said Barclays analyst Thomas Driscoll in a note, adding: “The assets appear to be a good strategic fit for CNQ.”