CNRL weighing its own PrairieSky-like spinoff

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For Encana, spinning off its Alberta royalty lands was a way to shore up its finances during a major restructuring. For Canadian Natural Resources Ltd., it's gravy.

Canadian Natural has a set of assets similar to those of PrairieSky Royalty Ltd., which kicks off royalty income and requires little capital spending. Encana spun off PrairieSky in late May and early June in an initial public offering that rang in at $1.67-billion, the largest Canadian IPO in 14 years.

Canadian Natural's royalty cash flow for 2014 is estimated at $140-million to $150-million, money that comes in from third parties who pay for the right to drill on Canadian Natural's acreage. The company said it will figure out the best way to wrest value from the assets by the end of this year.

"Right now, we're in the process of understanding exactly what we have and we're going to evaluate all the options, including, sort of, the PrairieSky option, which obviously looks attractive," president Steve Laut said at Canadian Natural's investor open house.

"Whichever creates the most value for shareholders, that's the one we'll choose."

It increased its holdings of such acreage early this year when it acquired Devon Energy Corp.'s Canadian conventional oil and gas operations in a $3.1-billion deal. The assets being considered for a possible spinoff could be worth $2-billion to $2.5-billion, said Chris Feltin, analyst at Macquarie Capital Markets.

As Encana discovered, investor appetite for such a low-risk business is almost insatiable. The company initially expected to rake in proceeds of $860-million, while hanging on to 75 per cent of PrairieSky. In the end, the IPO generated almost double that amount and Encana was left with 54 per cent of the business.

Mr. Laut said Canadian Natural had not decided whether it will hang on to part of its royalty lands or part with the whole package. Even without the royalty stream, the company's other operations are generating enough free cash flow that it is able to consider stock buybacks, dividend hikes and acquisitions.

A sale, rather than an IPO, would be simpler for Canadian Natural. However, many investors favour another pure-play royalty vehicle jumping in to the market, Mr. Feltin said.

"Is it worth the process to go full IPO with these assets, or do they look at finding a way to divest part or all of their interest through a disposition process? Arguably, with an outright sale, you'd probably be looking at realizing a lower multiple compared to what a company like PrairieSky is trading at. But it's a much cleaner transaction," he said.

"I think that the market is telling you, with the PrairieSky valuation, that these royalty income lands are an attractive investment vehicle."

Shares in PrairieSky fetched $39.09 on the Toronto Stock Exchange on Tuesday, up 40 per cent from their IPO price of $28.