Bay Street praises CNRL’s acquisition of Devon Energy, but will shareholders benefit?

Bay Street is praising Canadian Natural Resources Ltd. for striking a bargain when the oil producer scooped up the Alberta assets of U.S.-based Devon Energy Corp. for $3.8-billion, in a deal announced this week. But for all the gushing from investment bankers, will long-suffering shareholders benefit from the deal?

CNRL’s share price, along with much of Canada’s floundering energy sector, is languishing at levels seen in 2007 – and recent deal-making has failed to spark any bullish enthusiasm among investors.

Mergers and acquisitions activity certainly wasn’t a winning strategy last year, when the price of Western Texas Intermediate crude (a U.S. benchmark) plummeted in the second half of 2018, Western Canadian Select crude (a Canadian benchmark) fell to multiyear lows and the broad Canadian energy sector ended the year down 28 per cent.

As a result of this dismal backdrop, investors essentially dismissed oil patch deals: For the 24 public M&A energy transactions in 2018, the acquirer’s share price fell by an average of 10 per cent within a month of the announcement of each deal, according to CIBC World Markets.

But many analysts are enthusiastic about the CNRL-Devon deal.

“In general terms, we would say that the market is supportive of deals that make a tonne of strategic and financial sense and the CNRL-Devon deal can easily be characterized that way. Other deals where the acquirer is stretching on price or capabilities or other factors, they tend to get slaughtered for doing the transaction,” Jon Morrison, an analyst at CIBC World Markets, said in an e-mail.

Some current shareholders say they believe the deal underscores a bullish thesis predicated on industry consolidation.

“The company has much more control over the industry,” said Bill Harris, a partner and portfolio manager at Avenue Investment Management, which owns the stock.

He added that three producers are emerging with the lion’s share of the Alberta oil sands – Suncor Energy Inc., Imperial Oil Ltd. and CNRL – suggesting that the sector is heading in the same direction as the postwar auto industry with the emergence of the Big Three.

“We’re not adding barrels. We’re going to consolidate what’s already there, and turn it into a cash, money-making machine,” Mr. Harris said, referring to CNRL.

Indeed, Canadian Natural has grown to be the country’s second-largest oil company, behind Suncor, through a string of acquisitions, many of them in the oil sands. TD Securities pointed out CNRL has spent $31.3-billion on assets since 2000, and has sold just $2.7-billion of properties.

The company, led by London-based billionaire Murray Edwards, has recently feasted on foreign-owned producers anxious to exit their positions in the capital-intensive industry. In the process, it has managed to avoid the investor scorn heaped upon its rivals when they have made acquisitions in recent years – even as export pipeline capacity remains squeezed.

Mr. Edwards’s style has been to exercise patience in auctions and not overpay. Indeed, CNRL had been tipped as the most likely suitor for Devon’s assets when the Oklahoma City-based oil producer announced in February it was seeking buyers for the remainder of its Canadian business. Husky Energy Inc. had just abandoned a hostile bid for MEG Energy Corp. and Cenovus Energy Inc. shares have yet to fully recover from its rocky 2017 acquisition of ConocoPhillips’s oil sands business.

Investors have welcomed the deal’s favourable financing that adds minimally to the company’s overall debt while adding $500-million to $700-million of free cash flow to the balance sheet, said Travis Wood, an analyst at National Bank Financial. Meanwhile, CNRL has pledged to maintain its brisk stock buyback program, which could total up to $1.1-billion this year.

Because of the deal’s structure and the company’s strong balance sheet, there is no need for CNRL to sell other assets to pay down debt after the deal closes, Mr. Wood said.

The company has played a leading role in lifting overall Canadian ownership of the oil sands to 82 per cent from 64 per cent just two-and-a-half years ago, according to TD Securities analyst Menno Hulshof.

In 2017, the company paid more than $14-billion for Royal Dutch Shell PLC’s oil sands mining assets, and $975-million for Cenovus Energy Inc.’s Pelican Lake and Ipiatuk oil sands properties in Alberta. A year later, the company bought the undeveloped Joslyn oil sands project from France’s Total SA as well as assets from Laricina Energy Ltd., for a total of about $275-million.

All of the acquisitions added to an already-sizable oil sands business that included the Horizon mining project and Kirby steam-driven development in northern Alberta.

But for all the deal-making, investors have seen little reward: CNRL’s shares closed Friday at $36.51 – off slightly for the day, but down more than 25 per cent from their recent highs last July.

That said, CNRL has clearly emerged as a dominant player in the oil sands at a time when multinational producers are retreating from the region. A bet on the company today is a wager that the multinationals have it wrong – and that when industry conditions improve (crude oil rallies and pipelines expand), CNRL will be a winner.