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Streetwise Shell finds the right timing with Canadian Natural Resources share sale

Royal Dutch Shell PLC and its banks have cashed in on one of precious few opportunities to unload a mountain of Canadian energy shares at a tidy profit.

Shell’s $4.3-billion secondary offering of Canadian Natural Resources Ltd. stock was said on Tuesday to be placed mostly with institutional investors. This comes despite their much-discussed weariness with a sector that has lagged many others in the market owing to well-publicized problems with export capacity constraints arising from opposition to pipelines.

Shell acquired the 98 million Canadian Natural shares as partial payment for its Athabasca oil sands project, and the market had been placing bets on the timing of a sale. It uncorked the offering late on Monday, just as U.S. oil prices pushed through US$70 a barrel for the first time in 3½ years, and after Canadian Natural had logged a gain of 16 per cent since the oil sands deal closed in late May, 2017.

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Shell selling stake in Canadian Natural Resources for $4.3-billion

Canadian Natural, backed by Calgary financier Murray Edwards, is one of a small number of domestic energy companies for which a major share sale would not elicit concern among investors, given its record of profitability during the downturn. The acquisition has served to strengthen its results while production has surged.

Large shareholders that have stuck with the company through the oil-price crash are likely happy to take advantage of a bargain on the stock as industry conditions improve, said Travis Wood, analyst at National Bank Financial. The shares were offered at US$34.10 apiece, 2.9 per cent under Monday’s close.

“That’s a lot of stock into a market where there doesn’t seem to be a lot of demand for Canadian energy,” Mr. Wood said.

“But the large shareholders there, they could probably do 70 per cent [of the offering]. They’d be glad to take it at a discount.”

Indeed, Canadian Natural itself could buy some shares, given its capacity due to an estimated $4.5-billion in free cash flow this year, he said. The company declined to say whether that was the case.

The shares fell about 2 per cent to US$34.27 on the New York Stock Exchange on Tuesday. Meanwhile, West Texas intermediate oil sank US$1.67 to US$69.06 a barrel following U.S. President Donald Trump’s decision to pull the United States out of the Iran nuclear deal.

The underwriting syndicate for the secondary offering included Goldman Sachs Group Inc., Bank of Nova Scotia, Royal Bank of Canada and Toronto-Dominion Bank. An investment industry source said that the banks had agreed to take smaller-than-normal fees in a competitive process to participate in the sale, which ranks with the richest-ever bought deals by TransCanada Corp. in 2016 and Barrick Gold Corp. in 2009.

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Canadian Natural’s acquisition of Shell’s oil sands business was one of several deals in recent years in which the seller took shares in the buyer as part of the payment. Most have proven less lucrative.

Shell still holds shares in Tourmaline Oil Corp., which it acquired in a US$1-billion sale of British Columbia and Alberta shale acreage in 2016. ConocoPhillips remains underwater on 208 million Cenovus Energy Inc. shares it acquired in its $17.7-billion sale of oil sands assets in 2017.

Cenovus has struggled to win back investor favour following the deal, which resulted in a change of the chief executive officer shortly after it closed. ConocoPhillips’ stake in Cenovus is worth about US$600-million less than when it announced the asset sale.

The Canadian Natural sale shows that an equity issue in the industry has to be done by a market leader in the current climate, said Martin Pelletier, co-founder and portfolio manager with TriVest Wealth Counsel.

Investors may also stay on the sidelines until major projects, such as the Kinder Morgan Trans Mountain oil pipeline expansion, or Shell’s proposed liquefied natural gas project on Canada’s West Coast, begin construction.

With a report from Andrew Willis in Toronto

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