Canadian Natural Resources Limited Got a Steal of a Deal

Canadian Natural Resources Limited (TSX:CNQ)(NYSE:CNQ) acquired Royal Dutch Shell plc (ADR)’s (NYSE:RDS.A)(NYSE:RDS.B) oil sands assets for a 40% discount.

| More on:
The Motley Fool

Canadian Natural Resources Limited (TSX:CNQ)(NYSE:CNQ) made a big splash last week when it signed agreements to acquire several oil sands assets from Royal Dutch Shell plc (ADR) (NYSE:RDS.A)(NYSE:RDS.B) and Marathon Oil Corporation (NYSE:MRO).

Overall, the Canadian oil giant paid a massive $12.74 billion to bulk up its position in western Canada, which marked the largest acquisition in the company’s history. However, what was more impressive about the deal wasn’t the size of the purchase price, but the size of the discount the company got on the assets, which was well below the replacement cost.

Drilling down into the deal

Canadian Natural Resources’s acquisition is as complex as it is costly. As part of the deal, Shell and Canadian Natural Resources are jointly buying out Marathon Oil’s 20% stake in Athabasca Oil Sands Project (AOSP). From there, Canadian Natural Resources will acquire a 70% interest in AOSP, which includes the 126,000-barrel-per-day Jackpine Mine, the 154,000-barrel-per-day Muskeg River Mine, and the Jackpine Mine Expansion, which is an approved 100,000-barrel-per-day expansion.

The deal also includes a stake in the Scotford upgrader and the Quest Carbon Capture and Storage facility. Further, the company will acquire various producing and non-producing oil sands leases, including the Peace River Complex and Carmon Creek thermal in situ operations and the Cliffdale heavy oil field.

To pay for the deal, Canadian Natural Resources will issue Shell more than 97.5 million shares of stock valued at roughly $4 billion, and it will also make a combined upfront cash payment of $8.24 billion to Shell and Marathon Oil. Further, the company will pay Marathon Oil a US$325 million deferred payment in the first quarter of next year.

Price is what you pay; value is what you get

While the purchase price was a staggering $12.74 billion, what’s noteworthy about the deal is that Canadian Natural Resources could not replicate these assets for that price. In fact, most analysts believe that it would cost more than $20 billion to build these assets from scratch, implying the company bought them at a 40% discount to replacement costs.

Meanwhile, Canadian Natural Resources is getting a much better deal than Marathon Oil did when it initially bought its stake in the project for US$6.6 billion in 2007, because Marathon Oil will only receive US$2.5 billion for selling that stake today. That’s despite the fact that ASOP has expanded significantly since that time and now includes the Jackpine mine.

While Canadian Natural Resources will take on a hefty $9 billion of incremental debt to close this deal, its credit metrics will actually improve significantly. That’s because it is getting these assets for such a good value that the transaction will be immediately accretive to the company’s cash flow and earnings.

As a result, its book-to-capitalization ratio will fall to 41% at the end of this year and 35% next year. Further, its debt-to-EBITDA will improve from 2.4 times to 1.6 times over the next year at current oil prices, thanks in part to the upcoming completion of its Horizon oil sands expansion.

In other words, Canadian Natural Resources will get both bigger and better with this deal.

Investor takeaway

Canadian Natural Resources pounced on the opportunity to acquire a top-tier oil sands asset at a significant discount. That sets the company up to thrive even if oil prices remain low. Meanwhile, if oil prices improve in the years ahead, this deal will pay even bigger dividends for investors.

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 Matt DiLallo has no position in any stocks mentioned.

More on Energy Stocks

little girl in pilot costume playing and dreaming of flying over the sky
Energy Stocks

The U.S. Stocks Every Canadian Investor Needs to Know About

Boeing, UGI Corporation, and Exxon Mobil are three U.S. stocks I'd buy today.

Read more »

Silhouette of businessman sit on chair and hold a cigar and looking at the city in night.
Energy Stocks

Passive Income: How to Make $104 Per Month Tax Free in 20 Years

By simply choosing the right stock, and investing in it on a consistent basis, you can create massive passive income…

Read more »

A worker overlooks an oil refinery plant.
Energy Stocks

Where to Invest in Oil Stocks in June 2023

Suncor Energy is a Canadian oil stock that's set up to benefit from strong oil prices, as it trades at…

Read more »

edit Sale sign, value, discount
Energy Stocks

Buy Alert: Major Canadian Energy Stocks Are on Sale in June 2023 

Did you hear of a June sale? Well, Canadian energy stocks are trading near their lows in June 2023. It's…

Read more »

Dollar symbol and Canadian flag on keyboard
Energy Stocks

Canadian Blue-Chip Stocks: The Best of the Best for June 2023

TSX blue-chip stocks such as Enbridge can help you generate steady gains and benefit from a high dividend yield in…

Read more »

oil and gas pipeline
Energy Stocks

Pipeline to Prosperity: Invest in Enbridge Stock and TC Energy

Canadian pipeline stocks are buy-and-hold stocks, as oil and gas exports significantly contribute to Canada's GDP.

Read more »

tsx today
Energy Stocks

TSX Today: What to Watch for in Stocks on Monday, June 5

An early morning rally in oil prices could lift TSX energy stocks at the open today.

Read more »

oil and natural gas
Energy Stocks

These Canadian Energy Stocks Are Bargain Buys for 2023

Here are two of the best Canadian energy stocks you can buy on the dip in 2023 to hold for…

Read more »