Canadian Natural Goes Bargain Hunting

Did the Canadian Energy giant get a good deal?

| More on:
The Motley Fool
You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

It was only six weeks ago that Canadian Natural Resources (TSX:CNQ)(NYSE:CNQ) abandoned plans to sell some of its natural gas assets. The company was unwilling to sell right into a buyer’s market. Now CNRL has flipped the switch entirely, with its $3.1 billion purchase of some Devon Energy (NYSE:DVN) gas assets. CNRL is a very prudent capital allocator, so one would instinctively think the company got a good deal. And at first glance, that appears to be the case.

First of all, the $3.1 billion purchase represents about 6% of the company’s enterprise value. And for that price, CNRL will be increasing its production by 11%. But the news gets better.

The deal will also provide CNRL with $75 million in annual royalty revenue. The company likely will be combining that revenue with its current royalty portfolio and selling it all off some time this year. Royalties are often highly sought after, and demand high multiples. For example, Silver Wheaton (TSX:SLW)(NYSE:SLW) trades at 20 times earnings. But even if one uses only a 10x multiple on Devon’s royalty stream, that brings down CNRL’s net purchase price to $2.4 billion, or 4.6% of enterprise value.

The assets are also a good fit with CNRL’s existing production, meaning that there should be plenty of opportunities for cost synergies. As an added bonus, the deal also provides CNRL with 2.2 million undeveloped acres, which could be used to develop liquids-rich natural gas and light oil.

Foolish bottom line

Before even digging into the numbers, one could easily conclude that CNRL got an excellent deal. Given the state of the Canadian energy market, the company without doubt has plenty of deals to choose from. And given management’s track record, one could be fairly confident that the company didn’t overpay. CNRL’s shares rose by nearly 4% in reaction to the news, and for good reason.

With so many other companies looking to sell gas assets in western Canada, CNRL will have plenty of opportunities to do similar deals. Unfortunately for the sellers, CNRL won’t accept anything but another bargain.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair holds no positions in any of the stocks mentioned in this article.

More on Investing

TSX Today
Energy Stocks

TSX Today: What to Watch for in Stocks on Thursday, August 11

Rising commodity prices could take energy and mining shares on the TSX higher at the open today.

Read more »

Supermarket aisle with empty green shopping cart

$183 for Toilet Paper and Cups: Why We Love Costco Stock

"I literally went up there to get two things."

Read more »

A worker gives a business presentation.

TFSA Investors: 2 Top Stocks to Buy Before They Rally Any Further

Although plenty of top Canadian stocks have been rallying recently, these two still offer great value and are perfect for…

Read more »

growing plant shoots on stacked coins
Stocks for Beginners

3 TSX Stocks With High Dividend Yields

Are you looking for a great opportunity to bolster your portfolio? Here are three TSX stocks with high dividend yields.

Read more »

financial freedom sign
Stocks for Beginners

1st-Time Investors: 2 Cheap Canadian ETFs to Buy for Financial Freedom 

Investing for the first time but don’t know where to start? Here are two cheap Canadian ETFs that can grow…

Read more »

Money growing in soil , Business success concept.
Dividend Stocks

Got $4,000? 4 Simple TSX Stocks to Buy Right Now

The macroeconomic environment is tense but investing can be simple. Here are four stocks to buy now and book your…

Read more »

Oil pumps against sunset
Energy Stocks

2 Top Canadian Energy Stocks to Buy Offering Dividend Yields Above 6%

These two top Canadian energy stocks are excellent long-term investments and offer unbelievable dividend yields if you buy them today.

Read more »

Target. Stand out from the crowd

4 TSX Stocks I Own and Will Buy More of if They Fall

These are my four top choices of TSX stocks that may dip in the future, but will pay me back…

Read more »