Canadian Natural Resources Ltd. has jacked up its acquisition budget and is on the hunt for natural gas assets, aiming to take advantage of attractive deals while riding out an industry glut.
CNRL predicts an oversupply of natural gas could last as long as seven years, keeping prices low. The company is prepared to acquire gas properties but hold off on spending to bring them into production as long as the glut persists.
A strong financial cushion makes possible the strategy of investing now for future payoffs, CNRL argues. In the near term, fast-growing oil production will be enough to power the company, but buying new oil properties now makes no sense because they have become too expensive, CNRL president Steve Laut said in an interview. Oil price have surged to around $100 (U.S.) a barrel, sending the value of oil companies and assets soaring.
CNRL's plan demonstrates both the difficulties of producing natural gas as prices languish, and the advantage large, diversified companies have over some competitors. Natural gas powerhouse Encana Corp., for example, recently sold half of a prolific shale play to China's largest energy company so it can speed up development there. Chesapeake Energy Corp., which controls vast swaths of shale gas plays in the United States but is battling its debt, sold $4.75-billion worth of gas assets to BHP Billiton Ltd. last week. Further, a slew of conventional gas assets have been up for grabs as unconventional players sharpen their focus.
"Our production will go down, but we will preserve our asset base. We don't need to grow [gas]production to grow value," Mr. Laut said. "With our dominance of our core areas, we can leverage our infrastructure and get the costs down where other players can't, so gas works."
The Calgary-based company controls conventional and unconventional gas assets in Western Canada, the North Sea, and offshore West Africa. If it picks up more natural gas properties, it wants to stick to these areas, Mr. Laut said. Acquisitions top the list of CNRL's plans for its free cash flow.
"We're starting to see more deal flow," Mr. Laut said during the company's fourth quarter conference call. "Not to say that we've got them in the bag, but we think there will be more opportunities so we increased the budget."
CNRL initially planned to spend $110-million on acquisitions in 2011, but has since increased this to $350-million.
"There is nothing irrational about any of this," said Michael Tims, co-chairman of investment dealer Peters & Co. Ltd. "A well-financed company that wants to make an investment for the future - I think that will be a sound strategy - so long as you are in a position to wait through the next couple of years." CNRL fits the bill, he said.
CNRL's acquisition ambitions come as the company mapped out significant increases in its oil production while pulling back on gas activity. In 2011, it wants to increase its heavy oil production by 11 per cent, followed by annual growth in this area of around 10 per cent; increase light oil production by 11 per cent - although its growth will be "a bit lumpy" as other projects are launched - with a target of 7 per cent in 2012; and boost thermal heavy oil production by 12 per cent.
However, a fire at its Horizon oil sands plant in early January will erode cash flow and production in 2011, the company said. It is still investigating the cause of the fire and the extent of the damage. It does, however, expect its insurance to cover the cost of repairs and production interruption.
CNRL, which axed further drilling at its Olowi project in Gabon as it took a writedown on the asset because of poor performance, lost $416-million (Canadian), or 38 cents a share, in the fourth quarter, compared to a profit of $1.7-billion, or $1.56, in the same quarter in 2009. The loss included an unrealized after-tax expense of $1-billion tied to "risk management activities," foreign exchange fluctuations, stock-based compensation, and an impairment charge on a property in Gabon.
Factoring out these items, the company made $618-million, or 57 cents a share, compared with $2.57-billion, or $2.36, in 2009.
CNRL results
CNRL, which axed further drilling at its Olowi project in Gabon as it took a writedown on the asset because of poor performance, lost $416-million, or 38 cents a share, in the fourth quarter, compared with a profit of $1.7-billion, or $1.56, in the same quarter in 2009.
The loss included an unrealized after-tax expense of $1-billion tied to "risk management activities," foreign exchange fluctuations, stock-based compensation, and an impairment charge on a property in Gabon.
Factoring out these items, the company made $618-million, or 57 cents a share.
Carrie Tait