CNRL, bullish on gas prices, buys Devon properties for $3.1-billion

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Canadian Natural Resources Ltd. said it will spend $3.1-billion to acquire Devon Energy Corp.'s natural gas properties in Canada, in a bet that rallying gas prices will remain firm amid resurgent demand.

The assets are in areas next to or close to CNRL's current operations in western Canada, and include natural gas, natural gas liquids and some light oil.

After languishing for years because of industry oversupply and weak demand, natural gas prices have risen to multiyear highs in recent weeks amid frigid weather in North America. CNRL president Steve Laut said the deal is weighted heavily toward natural gas – about 70 per cent of the acquisition – and he predicted strong gas pricing in 2014 and potentially 2015. "That helps the metrics of this deal," he said.

The acquisition is also something of an about-face for Calgary-based CNRL, which a little more than a month ago yanked plans to sell or share some of its Montney natural gas assets in British Columbia because of low-ball bids.

But CNRL officials said Wednesday's deal is a natural fit. Mr. Laut said his company already knew the Devon assets well, and was able to make a quick evaluation. "In effect, we have home field advantage," he said in a conference call on the sale.

The transaction builds on a pick-up in deal activity after a long dry spell. In November, Talisman Energy Inc. announced plans to unload a big chunk of its Montney assets for $1.5-billion; two weeks ago, Baytex Energy Corp. unveiled plans to buy Aurora Oil & Gas Ltd. for $1.8-billion.

There's been some "market therapy," said Adam Waterous, global head of investment banking at Scotia Capital. "Both buyers and sellers have gone for a ride on the learning curve."

Even though energy companies have been desperately trying to unload assets in recent years, few deals were completed. For the longest time, buyers and sellers weren't seeing eye-to-eye on price.

Now both sides are starting to reset their expectations. Sometimes, a "cure for low deal activity, is low deal activity," said Mr. Waterous, whose team advised on all three of the recent billion-dollar energy deals.

However, other analysts believe it's the quality of the assets rather than a changing climate that made the difference in Wednesday's deal.

Chris Seasons, president of Devon Canada, doesn't believe it's a sign of a larger trend for deals in the oil patch.

"Certainly, recent gas prices have been encouraging for people. That's helpful," he said in an interview. "But I wouldn't sing hallelujah from the rooftops in that the buy-sell spread has closed. I think it's more a function of the quality of the assets than anything."

While Devon had some debt to pay down, Mr. Seasons insisted this was about selling some high-value Canadian assets that weren't able to compete for capital internally with the company's U.S. light oil opportunities.

He said the company, which is headquartered in Oklahoma City, had retained bankers from Scotia Waterous, assisted by BMO, and had been planning to open its data room to show company holdings this week. But the CNRL offer earlier this month pre-empted the conclusion of that process.

"They were able to reach their own conclusions without even looking at the data room," Mr. Seasons said. "That's the benefit of what I would call a local competitor versus somebody who's coming in from outside the country, who doesn't have that advantage."

Mr. Seasons, who wanted at least $3-billion late last year when his company announced it would be putting natural gas assets up for sale, said he's pleased with the price. Given the favourable market reaction Wednesday, with both CNRL and Devon shares trading higher on the Toronto Stock Exchange, "it truly seems to be a win-win."

CNRL officials said they are welcoming Devon staff to CNRL as part of the transaction, with no layoffs planned. Mr. Seasons said it's a good outcome for 900 Devon employees.

The current estimated production before royalties from the Devon properties is 383 million cubic feet a day of natural gas, 10,800 barrels a day of light crude oil and 12,000 b/d of natural-gas liquids.

CNRL said in a news release Wednesday that the assets being acquired include a royalty revenue stream that is expected to earn about $75-million in cash flow this year. CNRL also said it is assessing the possibility of combining the acquired royalty stream with its own royalty revenue portfolio in order to create either a new vehicle that would provide steady cash flow to shareholders, or else monetization through a sale package later in 2014.

The targeted cash flow from the combined royalty streams is expected to be between $140-million and $150-million this year, CNRL said.

Included in the deal are six major owned and operated natural-gas plants and four major owned and operated oil batteries.

The transaction includes assets and production, as well as 2.2 million net acres of undeveloped land and 2.7 million net acres of royalty and fee simple lands.

With files from Bertrand Marotte in Montreal