Focus is on repaying debt, but opportunistic Canadian Natural also open to ‘sporadic’ dealmaking

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CALGARY — In the middle of a wave of mergers and acquisitions in the Canadian oil and gas industry, Canadian Natural Resources Ltd. sees opportunities but will balance its appetite for dealmaking with paying down its debt, according to the company’s top executive.

The Calgary-based company announced Thursday it would focused on deleveraging this year and set a goal of bringing down its debt to $15 billion. The company currently owes $20.1 billion in long-term debt, which is 8 per cent higher than last year when the company was carrying $18.6 billion of long-term liabilities on its balance sheet.

Even as it sets that goal, the company believes there are opportunities in the market for deals.

“Our real key focus is to delever and to work on our operations here but, you know, you never can say never. We’ve always been opportunistic in our acquisitions and we look at a lot of our opportunities where we feel we have synergies and we feel we can add value for our shareholders,” the company president Tim McKay said on a Thursday earnings call.

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Last year, Canada’s largest oil producer spent $350 million to buy Painted Pony Petroleum Ltd., a natural gas producer with assets in British Columbia. In 2019, it spent $3.8 billion to buy Devon Energy’s heavy oil and oilsands assets, and acquired Shell Canada Ltd.’s oilsands business for $12.7 billion in 2017.

In an interview with the Financial Post, McKay said there’s no pattern to the company’s deals and its recent acquisitions were “random, sporadic things” that the company didn’t plan for but pursued when market conditions were right.

“You never can predict things,” McKay said, reiterating that the company’s focus now is on paying down its debt rather than buying up smaller competitors.

Our real key focus is to delever and to work on our operations here but, you know, you never can say never

Tim McKay, president, Canadian Natural Resources

Still, there’s been a wave of deals in the Calgary oilpatch in recent weeks and months as oil and gas producers have looked to scale up by making deals. Most recently on Feb. 11, ARC Resources Ltd. announced it would use its own shares to buy Seven Generations Energy Ltd. in a $4.2-billion deal, including debt.

In October, Cenovus Energy Inc. merged with Husky Energy Inc. in a deal that valued the latter’s equity at $3.8 billion and saw Cenovus take on Husky’s $5.2 billion in long-term debt. Cenovus has yet to set a new debt target but has said its goal is to achieve an investment-grade credit rating.

Cost cutting and debt repayment has been a major focus of oilsands companies as they reported 2020 results, in part because many companies took on debt during the oil price crash of 2020, when the COVID-19 pandemic and oil price war between Saudi Arabia and Russia caused prices to collapse into negative territory for the first time in history.

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As oil prices have sharply rebounded, companies are turning their attention to reducing operating costs and repaying debt rather than drilling new wells and bringing production online.

McKay said oil prices continue to be “volatile” and the company is focused on reaching its debt target this year.

National Bank Financial analyst Travis Wood said in a research note Thursday that CNRL is on pace to drive its net debt down to $13.6 billion this year given rising oil prices, and believes the company could generate $6.9 billion in free cash flow, meaning the company could both pay down debt and buy smaller competitors.

“With an abundance of free cash flow, Canadian Natural has significant optionality for free cash flow allocation across debt reduction, returns to shareholders, organic growth and opportunistic acquisitions,” Wood wrote.

Canadian Natural increased its dividend 11 per cent Thursday to a payout of $1.88 per share annually.

Global oil prices rallied Thursday at the conclusion of an OPEC meeting, in which the group of oil exporting countries agreed to keep existing production levels rather than pump more oil into the market. The West Texas Intermediate oil price benchmark closed 4.2 per cent higher at US$63.83, after briefly surpassing its January 2020 peak of $64.86 earlier in the day.

CNRL shares jumped as much as 3 per cent in mid-day trading Thursday but ended the day up only half a per cent to $37.91 per share. The company reported adjusted net earnings of $176 million in the fourth quarter. The company also reported a $143 million provision related to the cancellation of the Keystone XL pipeline, following similar charges recorded by competitors Suncor Energy Inc. and Cenovus who were also prospective shippers on the line.

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The day’s biggest gainer in the Canadian oilpatch was MEG Energy Corp., with its shares rising 9.41 per cent to $7.44 per share.

Raymond James analyst Chris Cox said in a research note that MEG’s business offered “unrivalled leverage profile to rising oil prices,” and noted the company’s shares have jumped 83 per cent in the past three months as oil prices have rebounded.

MEG Energy Corp. announced Thursday it had repaid $132 million in long-term debt and refinanced $1.2 billion of existing debt to extend the timeframe in which its debts need to be repaid.

“In keeping with this strategy, we significantly reduced G&A (general and administrative expenses), repaid indebtedness, extended the maturity runway of outstanding long-term debt and began moving the majority of our barrels to the (U.S. Gulf Coast) for the first time,” MEG CEO Derek Evans said in a release.

Financial Post

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