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Devon's deal with Canadian Natural 'a textbook definition of an excellent fit'

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Devon's deal with Canadian Natural 'a textbook definition of an excellent fit'

As it works on its transition into a U.S.-focused producer, Devon Energy Corp. seems to have found a perfect partner in Canadian Natural Resources Ltd., which has snapped up Devon's Canadian assets as it continues in its bid to grow its oil sands assets.

Devon's C$3.8 billion agreement with Canadian Natural is a "win-win" for both companies, Canadian Natural executives said May 29. Devon's Canadian portfolio is composed of heavy oil assets principally located in Alberta, with an average net production of 113,000 barrels of oil equivalent per day in the first quarter of 2019 and proved reserves of about 409 million barrels of oil at year-end 2018.

The deal represents Devon's "clean and timely exit from Canada" so the company can work exclusively on its U.S. portfolio and its strategic shift to an oil growth business, Devon President, CEO and Director Dave Hager said in a separate release from the company. Devon announced its plan to divest its Canadian and Barnett Shale assets in February.

Canadian Natural officials spent much of a May 29 analyst call making points aimed at reassuring investors who might be displeased with a balance sheet-disrupting acquisition. Executive Vice Chairman Steve Laut said the purchase of Devon's Canadian assets would add value for shareholders in the short- and long-term.

"Canadian Natural's acquisition of substantially all the Devon Canada assets clearly makes sense and adds significant value for Canadian Natural shareholders. The assets not only add value but our balance sheet strengthens by year-end … while our ability to generate free cash flows increases and our share buyback program remains substantial," he said. "It's a textbook definition of an excellent fit."

Canadian Natural President Timothy McKay said the Devon assets are close to the company's existing assets in Alberta and no additional pipeline capacity will be needed to carry the approximately 113,000 boe/d of added production to market. Canadian Natural's history in the area, he said, should allow the company to improve production in a fairly short period of time.

The deal was also met with approval from most analysts, who support Devon's plans to focus on its best U.S. assets while reducing debt. Company executives described the sale as a necessary move as the company transitions into an oil-heavy producer in fewer areas.

According to Moody's Vice President Amol Joshi, Devon's departure from Canada "will sharpen its focus" on its oil-producing assets in the U.S. While the company will see a significant drop in its overall production for the short term, Moody's believes that Devon's approach is the correct one if it uses the capital to clean up its balance sheet.

Moody's said liquidating the Canadian assets eliminated an element of price volatility that a company such as Devon did not need as it shifts its overall focus. Tudor Pickering Holt & Co. said in a May 29 note that Devon's return for the assets topped most predictions. And though Mizuho had expected Devon to receive more for the assets, analyst Paul Sankey said the price tag was still a respectable one for the company.

Canadian Natural stepped in to buy the assets as international companies flee the country's production region amid price, transportation and environmental concerns. The company has remained profitable through the turmoil that has roiled the oil sands sector in recent years and plans to pay for the deal with a combination of cash flow from its operations, which in 2018 topped C$10 billion, and the addition of some debt.

Canadian Natural has been the biggest acquirer of oil sands assets since commodities prices slumped in late 2014, prompting oil majors to sell their holdings of oil sands, which are viewed as expensive to produce and carbon-intensive. The company has worked to reduce costs and pollution in its operations and has said the emissions intensity of bitumen production is now on par with many conventional crudes.

The Devon acquisition will make Canadian Natural the world's 25th-largest oil producer, and eighth among non-state-owned companies, Wood Mackenzie analyst Stephen Kallir noted.