PrairieSky Royalty Ltd., the company spun off by Encana Corp. last year, agreed to acquire royalty assets from Canadian Natural Resources Ltd. for C$1.8 billion ($1.4 billion).
The purchase will consist of C$680 million in cash and about 44.4 million PrairieSky shares at C$25.20 apiece, the companies said Monday in a statement. It brings together “two of the largest fee simple mineral title and royalty positions in Western Canada,” the Calgary-based companies said. Royalty lands generate revenue from drilling by other companies.
Canadian Natural is among energy companies shelving projects and offloading assets to withstand the oil slump. The company has long been considering selling or spinning off so-called royalty lands that generate revenue from drilling by other producers. An all-cash deal would have been more advantageous, according to Desjardins Capital Markets.
“This was one of the ‘easy levers’ the company had available to maintain its balance sheet strength,” Justin Bouchard, an analyst at Desjardins in Calgary, wrote Monday in a note. The agreement is “slightly positive” for Canadian Natural, “but is not as powerful as an all-cash deal.”
Canadian Natural shares fell 2 percent to C$32.98 at 11:55 a.m. in Toronto, while PrairieSky rose 2.54 percent to C$26.66.
While Canadian Natural has been mostly a buyer, the producer did a similar deal in 2005 when it sold royalty lands to the company now known as Freehold Royalties Ltd. Selling or spinning off so-called royalty lands had been under consideration for more than a year.
Shareholders of Canadian Natural will probably receive a minimum special distribution of about 50 cents per share before the end of 2016, Bouchard said. The agreement dictates the company must have reduced its ownership in PrairieSky to 10 percent either through a cash dividend or special distribution by that time.
The distribution is planned for around the Canadian Natural annual meeting in May 2016, Steve Laut, president of the company, said on a conference call Monday.
Canadian Natural follows Penn West Petroleum Ltd. and Cenovus Energy Inc. in parting with royalty assets this year. Cenovus in June agreed to sell lands to Ontario Teachers’ Pension Plan for about C$3.3 billion in cash.
5.4 Million Acres
In the latest deal, PrairieSky will acquire assets representing about 6,700 barrels of oil equivalent a day, or 81 percent of Canadian Natural’s royalty volumes. The assets comprise about 5.4 million acres throughout Western Canada.
PrairieSky was spun out by Encana in an initial public offering in May 2014 that raised C$1.46 billion. Last November it agreed to buy Range Royalty LP for C$699 million in stock.
Canadian Natural plans to reduce bank credit facilities with the cash portion of the proceeds of the sale. The deal, which the companies expect to close before the end of the year, is forecast to lower Canadian Natural’s debt to about two times its cash flow in 2016 based on U.S. crude averaging $57 a barrel, Greg Pardy, an analyst at RBC Capital Markets in Toronto, wrote Monday in a note.