The transaction announced Wednesday increases the Calgary-based energy giant's exposure to natural gas, a commodity that has been fairly unloved recently thanks to a chronic supply glut that has depressed prices. This winter's frigid temperatures in North America have heightened gas demand, but that effect is not expected to last.
In early 2013, Canadian Natural said it was trying to sell off its own natural gas acreage. But last month, it abandoned its hunt for a partner or buyer to take some of its vast Montney position in northeastern B.C. off its hands, opting instead to keep the properties.
"When I first saw that CNQ was buying natural gas properties in Western Canada, and before I read the details, I was kind of scratching my head," said Edward Jones analyst Lanny Pendill in an interview from St. Louis, Mo.
"Why would they be doing that now?"
But upon closer inspection, Pendill said he was convinced the Devon deal is a smart move. The Devon properties fit well with CNQ's existing acreage, leading to cost savings. Plus, there's the option to spin off royalty lands into a separate vehicle, much as Encana Corp. (TSX:ECA) intends to do with its position in Alberta's Clearwater area.
While the outlook for natural gas prices might be bearish in the mid-term, Pendill sees them strengthening within three to five years. So CNQ will have snapped up assets at an attractive price, with the option of hanging onto them until the picture brightens.
About 30 per cent of the assets produce more valuable natural gas liquids and light oil, which can be developed sooner, he added.
Devon Canada's Oklahoma-based parent has been in the midst of refocusing its business by selling off non-core assets.
"It's very opportunistic," said Pendill. "I think, essentially, what we've seen is a company with a strong financial position taking an opportunity of a weaker company that's trying to sell off some assets to regain its focus. In doing so, they've bought some assets that fit very nicely at a very reasonable price, with some longer-term value."
As part of the deal, CNQ will also acquire six natural gas plants and other infrastructure.
"This acquisition fits our strategy of opportunistically adding to our existing core areas where we can provide immediate value with the opportunity to add value in the future," company president Steve Laut said in announcing the deal Wednesday.
Pendill said he doesn't see the deal as a sign that a buyer's market for natural gas is about to come to an end.
"Everybody and their brother that has a significant interest in gas right now is trying to sell gas-based assets. From time to time you're going to find somebody pulling the trigger on these deals as the price becomes right and as it makes sense for each of those companies," he said.
"But today's announcement, in my mind, is no indication that we're at a turning point where companies are relooking at the gas business and thinking differently about things going forward."
In addition to the producing assets, Canadian Natural will acquire more than two million acres of undeveloped land and nearly three million acres of royalty lands from Devon.
The deal doesn't include Devon's holdings in the Horn River area or its heavy oil properties.
Canadian Natural expects the deal to close April 1.
Shares in Canadian Natural closed up 3.7 per cent at $40.63 on the Toronto Stock Exchange.
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