Canadian Natural Acquires Devon Assets for $2.86 Billion

Canadian Natural Resources Ltd., the nation’s second-largest natural gas producer, agreed to buy Devon Energy Corp.’s conventional assets in Canada for C$3.13 billion ($2.86 billion) to boost output.

The cash purchase will add 2.2 million undeveloped acres near Canadian Natural’s fields in western Canada, President Steve Laut said in a conference call today. The acquisition, which is about 70 percent gas, will increase production at the Calgary-based company by the equivalent of 86,633 barrels a day.

“This adds value in the near-, mid- and long-term,” Laut said. The company expects “pretty strong gas pricing” this year and next, he said.

Canadian Natural is making its largest acquisition since 2006 as prices for the heating fuel reach a four-year high. The purchase will reduce the percentage of company output that is heavy oil to about 41 percent from 45 percent, according to Phil Skolnick, an analyst at Canaccord Genuity Corp.

The decision to add to its holdings comes after Canadian Natural said last month it wouldn’t sell 250,000 acres of shale gas fields in British Columbia because the bids it received were insufficient.

Devon’s assets will add about C$75 million in cash flow for Canadian Natural this year. The sale, expected to close April 1, includes gross proved reserves of 272.2 million barrels of oil equivalent and six gas plants.

Canadian Natural gained 3.7 percent to C$40.63 at the close in Toronto, the biggest intraday increase since Oct. 10. Devon climbed 2.1 percent to $64.25 in New York.

Devon Sales

Gas futures prices rose above $6 per million British thermal units today on the New York Mercantile Exchange for the first time since 2010. Encana Corp. is the largest Canadian gas producer.

Devon announced Nov. 20 it was seeking a buyer for the Canadian assets as well as holdings in the U.S. Rocky Mountains, Arkoma Woodford shale and Gulf Coast to help pay for its $6 billion purchase in the Eagle Ford of Texas. The Oklahoma City-based company, which is retaining its Canadian heavy-oil properties, is concentrating spending on the Eagle Ford and other oil-producing deposits.

“The sale was quicker and at the high end of our expectations,” Scott Hanold, a Minneapolis-based analyst at RBC Capital Markets, wrote in a note to clients today. “There was a fair amount of skepticism on the company’s ability to sell the assets at a decent price,” wrote Hanold, who rates Devon a buy and doesn’t own the stock.

Devon said it expects to complete sales of the U.S. assets by year end.

‘Modest Positive’

The acquisition is a “modest positive” for owners of Canadian Natural debt, Matthew Kolodzie, a credit analyst at RBC Dominion Securities Inc., wrote in a note to clients today.

“The increased production is a positive as is the potential to exploit undeveloped land in the future,” Kolodzie wrote. Canadian Natural may also monetize its royalty streams “which would allow for some future debt repayment.”

Canadian Natural financed the purchase using credit facilities, Chief Financial Officer Corey Bieber said on the conference call. The company negotiated an additional C$1 billion committed term facility with the Bank of Montreal, available upon closing.

The company is considering other “flexible” financing options as its cash flow increases, Bieber said.

Scotia Waterous was the lead financial adviser to Devon on the sale and BMO Capital Markets advised and provided a fairness opinion to the board. Osler, Hoskin & Harcourt LLP was its legal adviser.

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