Canadian Natural Resources Company (CNQ - Free Report) recently inked a deal to acquire 100% stake in the Joslyn oil sands project for a total consideration of C$225 million. TOTAL S.A. (TOT - Free Report) is the chief operator of the Joslyn project, holding 38.2% stake. Other co-partners in the project are Suncor Energy Inc. (SU - Free Report) , Joslyn Partnership and Inpex Canada Limited, owning 36.8%, 15% and 10% interests each.
Per the deal, Canadian Natural will pay C$100 million on the closure of the transaction along with C$25 million that has to be paid annually for the next five years. Subject to satisfactory closing conditions and regulatory approvals, the deal is set for culmination on Sep 28, 2018.
The Troubled Joslyn Project
Located near Fort McMurray at the heart of the Athabasca deposit, the Joslyn project was started by TOTAL in association with a few minor partners at an estimated cost of $11 billion. Calgary-based Suncor joined the project in 2010, and it was believed that the project would gain momentum with Suncor’s experience and expertise in oil sands operations.
However, the project has been long grappling with challenges of ballooning costs. To add to that, the industry downturn in 2014 aggravated the challenges, wreaking havoc on the profit margins of most companies. High-production costs associated with the oil sands and the crude’s fall into bear market territory finally resulted in the project getting stalled in 2014.
Even with crude gaining momentum since the last year, there has not been much progress on the project, with activities limited to assuring the safety of the project along with regulatory requirement filings.
Sale Consistent With TOTAL and Suncor’s Strategies
Notably, TOTAL has been committed to reduce its oil sands holdings since the downturn, owing to high costs and environmental concerns associated with such projects. The process of extracting crude from oil sand reserves is extremely costly and a complicated one, involving strip mining and underground heating. Moreover, obtaining crude from oil sands is quite carbon-intensive, causing more than 15% higher emissions compared with the conventional methods of production.
TOTAL divested 10% stake in the Fort Hills project to Suncor in 2015, after putting a hold on the Joslyn project. Early this year, the supermajor offloaded another 3% stake in the project. It also jettisoned its 49% interest in the stalled Voyageur oil sands upgrader to the Canadian giant Suncor. The recent deal of selling its stake in the Joslyn project is in sync with TOTAL’s strategy.
In fact, many foreign companies including Norway’s Statoil, Royal Dutch Shell, plc (RDS.A - Free Report) , among others, have been reducing their stakes in Canadian projects.
Instead of ramping up activities in Joslyn, Suncor has shifted concentration to its most significant project, The Fort Hills. In fact, Fort Hills netted 70,900 barrels per day to Suncor in the second quarter and was a major driver of the company’s year-over year earnings growth.
A Smart Acquisition for Canadian Natural
Canadian Natural’s core operations are focused in Western Canada, the United Kingdom sector of the North Sea and offshore Africa, which includes Côte d’Ivoire, Gabon, and South Africa. Canadian Natural’s substantial world class oil sands mining assets, which include Horizon Oil Sands and the Athabasca Oil Sands Project (AOSP), are of particular significance.
Canadian Natural believes that the Joslyn project, located directly south of its Horizon oil sands project, will add value to its already impressive portfolio in the region and boost future growth prospects. Being in close proximity to Horizon's operations enables the company to benefit from synergies.
Since the two projects can share the same infrastructure, it will definitely lead to a reduction in developmental costs. It would also allow for more effective lease-line development between the two projects. Hence, Canadian Natural views Joslyn as a viable project at the moment, courtesy of location advantage, crude rally and the company’s expertise in oil sands operations.
But Will the Move Pay off Amid Pipeline Woes?
Canadian Natural’s prudent and well-timed acquisitions, including those of Athabasca and Pelican Lake, have allowed the company to improve its competitive edge. The latest acquisition of Joslyn also adds to its extensive portfolio and is expected to strengthen operations.
However, attractive economics of the project might still get neutralized by the infrastructural bottlenecks, which are presently grappling the North-American country. As we know, pipeline construction in Canada has failed to keep pace with rising domestic oil, forcing producers to sell their products at a discounted rate, which might hamper its revenues and earnings. The timing and costs associated with the project are also uncertain as of now.
As it is, the Zacks Rank #3 (Hold) company is bearing the brunt of higher expenses since the past several quarters. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Hence, how lucrative this acquisition will turn out to be for Canadian Natural is a wait-and-watch story. Notably, on a year-to-date basis, shares of Canadian Natural have declined 4.4% compared with the stocks in the broader industry’s collectively fall of 3.6%.
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