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Morningstar | Canadian Natural Agrees to Purchase Devon's Canadian Assets; CNQ Fair Value Unchanged

Canadian Natural Resources entered into an agreement with Devon Energy to acquire virtually all of the assets of Devon Canada for $2.8 billion (CAD 3.8 billion). The transaction is effective Jan. 1, 2019, with a targeted closing date of June 27, 2019. Under the deal, Canadian Natural will obtain a 100% working interest in the Jackfish steam-assisted gravity drainage oil sands project, which has an approved production capacity of 120 thousand barrels of oil per day; a 95% interest in 20 mbbl/d of Bonnyville primary heavy oil; and a 50% interest in the undeveloped Pike SAGD project.

To fund the transaction, Canadian Natural will use its newly negotiated CAD 3.25 billion committed term facility that will become available on the closing date. The company also expects to recognize CAD 135 million in annual synergies as a result of the acquisition. After incorporating the synergies, we think that Canadian Natural created value with the transaction, which equates to an acquisition price of CAD 29,000 per barrel flowing. Comparatively, SAGD expansion projects at Canadian Natural’s nearby Kirby project require CAD 30,000-CAD 35,000 per flowing barrel.

After incorporating the impact of the transaction into our forecasts, we are maintaining our Canadian Natural fair value estimate of $34 (CAD 45) and no-moat rating, as we don’t think the additional value moves the needle for the company. Our fair value estimate for Devon ticks up slightly to $31 per share from $30 because of Canadian Natural paying roughly 15% more than we think the assets are worth to Devon.

We expect the acquired assets to increase Canadian Natural’s exposure to the heavy oil discount, which we expect to widen over the next two years due to pipeline constraints and the upcoming IMO 2020 regulations. The acquired access only contain 15 mbbl/d of commitments on the Flanagan South pipeline, which is exposed to apportionment on Enbridge’s Mainline system. However, we do expect some relief in the upcoming years with the industry’s pipeline expansion projects. Combined, the acquired assets will add another 44 mbbl/d of commitments on the Keystone XL and Trans Mountain Expansion pipelines, and we expect apportionment to ease on the Mainline when Line 3 is built in 2020.

Canadian Natural's stock is currently trading near $26 (CAD 37), and we see about 20% upside. We think that the market is overlooking the company’s ability to generate cash flow amid low Canadian commodity prices, but we caution investors that we don’t expect the stock price to fully appreciate until there is more clarity surrounding pipeline expansions and expanded market access. Additionally, the stock is yielding 4%, which represents the head of the class among oil sands peers.

For a detailed look into Canadian crude market and pipeline trends, please refer to our January Energy Observer, "Pipeline Expansions Are Canada’s Lifelines.”