Canadian Natural Resources Gets Bargain With AOSP Deal

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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