Canadian Oil Business Gets More Canadian as Devon Exits

Devon Energy and its debt gets smaller, as Canadian Natural Resources adds to its huge, long-term bet on Canadian heavy and ultra-heavy crude.

Oil sands mines, like this one near Fort McMurray, are increasingly owned by Canadian companies as firms pull out due to low prices.
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Devon Energy took a big step toward becoming a pure-play shale oil producer by selling its Canadian properties to Canadian Natural Resources (CNR), which has used acquisitions to become the country’s largest oil producer.

Money from the $2.8-billion (C$3.8-billion) deal will allow Devon to focus on US unconventional production and lower its interest costs and improve profit margins. The sale price will help Devon reach its goal of lowering debt by $3 billion. It will also move 735 workers off its payroll.

Those workers will be moving over to CNR after the deal closes, which is expected in late June. Canadian companies have become the dominant players in the heavy oil business there by rapidly acquiring assets from US companies fleeing western Canada, where the price of oil has been deeply depressed by the inability to expand pipeline capacity to the US and global markets.

For CNR, this acquisition adds 128,000 B/D of oil production, mostly from oil sands, increasing its total to nearly 1.2 million B/D, primarily Canadian conventional heavy and oil sands crude.

Long term, the deal will offer growth opportunities for CNR, which will pick up 1.5 million acres of land, 1 million acres of which is undeveloped, with proved and probable reserves of 879 million bbl of crude, according to a news release.

“This productive capacity provides Canadian Natural with significant opportunities to grow production volumes at very attractive economics,” said Steve Laut, CNR executive vice chairman.

CNR added oil production as well as output potential for a low price, said Stephen Kallir, senior analyst at Wood Mackenzie. The price CNR paid per barrel for current production, much of it from the Jackfish oil sands project, “is well below other heavy oil and oil sands deals done in the past 5 years."

This was the latest of a series of sales since the 2014 oil price collapse that has made the Canadian oil business increasingly Canadian. “In 2020, the oil sands will produce 3.3 billion B/D and just four companies now account for 85% of that volume,” Kallir said.

While Devon is the more familiar name, the giant here is CNR. “When you remove national oil corporations, it is the eighth-largest, behind only the majors and ConocoPhillips. In comparison, Devon will drop from 49th to 56th,” Kallir said.

Devon is playing up the advantage of getting smaller. After it sells its shale gas production in the Barnett Shale—which it is planning to do this year—its business will be built on producing liquids and gas from four plays. And the proceeds of the sale will lower its annual interest cost by 45%, or $130 million.

“This transaction creates value for our shareholders by achieving a clean and timely exit from Canada, while accelerating efforts to focus exclusively on our high-return US oil portfolio,” said Dave Hager, president and chief executive officer of Devon.

An analyst from the bond rating firm Moody’s Investment Service said deals shrinking the company by 20% should aid its bottom line. The exit from Canada combined with the expected sale of its Barnett Shale assets should increase Devon’s margins,” said Amol Joshi, vice president and senior credit officer for Moody’s.

This deal may prove to be a plus for workers leaving Devon, which has been cutting staff as part of a program to reduce corporate overhead by $200 million.

The CNR announcement welcomed the Devon workers coming into the company and said it looks “forward to capturing their ideas and energy, and creating successes, as we have done in the past with Devon employees who have joined us,” alluding to a deal with Devon in 2014.