The market isn't giving the company enough credit for the recent acquisition.
Joe Gemino, CPA
12:25 PM | Email Article
Canadian Natural Resources
entered into agreements to acquire a 70% working interest in the Athabasca Oil Sands Project from Shell Canada and Marathon Oil, including a 70% interest in the Scotford upgrader. As part of the deal, the company also acquired working interests in other producing and nonproducing oil sands leases. Total consideration for the deal approximates CAD 12.74 billion, including the issuance of approximately CAD 4 billion in common shares to Shell and CAD 8.74 billion in cash payments to Shell and Marathon. To finance the cash payments, CNQ intends to add CAD 9 billion in incremental debt obligations. The deal is expected to close in mid-2017.
Joe Gemino, CPA, is an equity analyst for Morningstar.
The transactions add approximately 2.6 billion barrels of oil equivalent in proved reserves of upgraded synthetic oil and 3.7 million boe in proved reserves of heavy oil. CNQ’s AOSP working interest has the capacity to produce 204 boe/d of upgraded product, with February production forecast at approximately 195 boe/d. Under the terms of the deal, CNQ will operate the AOSP, while Shell remains the operator of the Scotford upgrader.
CNQ scored a bargain with the purchase, approximating CAD 60,000 per flowing barrel in capital outlay. Comparatively, large-scale Horizon mining expansion projects require CAD 80,000 per flowing barrel, making expansion unlikely in a $55/bbl oil price environment. We expect cash break-even prices (including a 10% internal rate of return) on the acquired assets to be sub-$55/bbl WTI, including the initial capital outlay.
After incorporating the impact of the transaction into our forecasts, we are raising our fair value estimate to $35 (CAD 46) per share from $30 (CAD 40). The stock is trading near CAD 42 per share, which represents a 10% discount to our fair value estimate. We believe that the market isn’t giving the company enough credit for the recent acquisition and upside remains in the stock. We are maintaining our no-moat rating.
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