CNRL shows faith in oil sands future with blockbuster $3.8 billion deal for Devon Energy

CNRL financed purchase with a $3.25 billion from Canadian and American sources

On the election trail, Jason Kenney bemoaned the exit of international companies from the Alberta oil patch and promised to stem the tide. “Getting investment back is critical,” the UCP leader said on April 2. A $3.8 billion sale of oil sands assets, announced Wednesday, demonstrates that the political stripe of the Alberta government really isn’t that important when oil companies decide to rationalize their assets.

Photo: Shell Canada

“The trend of companies and capital leaving Alberta energy for other areas of the world has been all too obvious,” he tweeted on May 16. While Devon is leaving Canada, its reasons have everything to do with the company’s new strategy to focus entirely on US oil plays. And while capital leaves Alberta as part of a “willing buyer, willing seller” deal, it’s also true that capital is flowing into Alberta to finance that deal.

CNRL $3.8 billion purchase of US giant Devon Energy’s oil sands assets, will add 108,200 barrels per day (b/d) of 100 per cent operated long-life, low-decline thermal in situ production, as well as 95 per cent operated 20,100 b/d of conventional heavy crude oil production, to the Canadian company’s output. The asset base is adjacent to existing Canadian Natural assets.

“These high-quality assets complement our existing asset base and provide further balance to our production profile, while not increasing the need for incremental market access out of western Canada, as it is already existing production,” CNRL President Tim McKay said in a media release. “The assets provide us the opportunity to add value through synergies, including facility consolidation and operating and marketing efficiency opportunities, with targeted benefits of C$135 million on an annualized basis.”

The company says it will leverage the “significant existing infrastructure” at the Jackfish, Kirby South, Kirby North, and Primrose operations. By the end of the year Canadian Natural expects production will grow 250,000 b/d of thermal in situ production, 450,000 b/d of oil sands mining and upgrading production, 150,000 b/d of conventional light crude oil and natural gas liquids production, 120,000 b/d of heavy crude oil production and 220,000 barrels of oil equivalent/d of natural gas production.

“The ongoing opportunity to leverage technology, innovation and drive synergies is further enhanced through the economies of scale gained,” said the release.

Kevin Birn, oil sands dialogue director for IHS MarkIt, said the CNRL purchase continues the “pivot to specialization” that started after prices collapsed in late 2014. “Through a down-cycle like we’ve experienced, it’s common to see oil companies flee to their best asset,” he said in an interview. “The big oil sands-focused companies are specialized and they would argue that gives them a competitive advantage.”

Devon is using the same strategy, according to Ed Hirs, an energy economist with the University of Houston, focusing on core positions “with significant operating scale: in four American basins: the Delaware (part of the Permian in West Texas), STACK (Oklahoma), Powder River and Eagle Ford (south Texas). In the fourth-quarter of 2018, these assets delivered light-oil production growth of 20 percent year over year, with total production averaging 296,000 oil-equivalent barrels (Boe) per day. New Devon has operating margins that are 57 percent above the total company average in 2018 and has demonstrated well productivity that has exceeded the industry average by approximately 40 percent over the past three years.

“The sale of Canada is an important step in executing Devon’s transformation to a U.S. oil growth business,” said CEO Dave Hager, who added that his company expects to sell its Barnett Shale natural gas assets in north Texas by the end of 2019.

CNRL’s purchase of the Devon assets was financed by a new CDN$3.25 billion committed term facility loan, which is expected to fully fund the net purchase price.

The Calgary-based company’s access to capital contradicts another popular narrative – that Alberta producers aren’t competitive in North American capital markets – of the new Premier and industry groups like the Canadian Association of Petroleum Producers.

When Canadian Natural purchased Shell Canada and Marathon Oil assets in 2017 for $12.4 billion, it negotiated $9 billion to finance the deal, including up to $6 billion in a bridge facility to bonds in the US and Canadian debt capital markets.

Hirs notes that after years of providing enormous amounts of capital for shale expansion, Wall St. is clamping down on US companies that can’t produce a profit, but Canadian and American firms with strong balance sheets have no trouble with financing.

“Furthermore, the Devon oil field assets are producing and, therefore, easily financed,” said Hirs.

Devon’s assets included 1.5 million acres of land, of which one million acres are undeveloped, “providing significant upside value and opportunities,” according to CNRL’s release.

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