Oil-Sands Buyout Spree Paying Off as Takeovers Boost Output

(Bloomberg) -- The acquisition spree that returned much of Alberta’s oil sands to Canadian hands is so far working out as the buyers projected, with results at Canadian Natural Resources Ltd. and Cenovus Energy Inc. beating expectations on the back of higher output and lower costs.

Canadian Natural posted third-quarter profit on Thursday that topped analysts’ estimates as its buyouts of Royal Dutch Shell Plc’s and Marathon Oil Corp.’s stakes in the Athabasca Oil Sands Project pushed production above a million barrels a day. Cenovus, which acquired ConocoPhillips’ oil-sands assets earlier this year, also beat expectations as output doubled.

Those results may start to allay investors’ fears that Canada’s oil-sands operators took on too much risk by doubling down on one of the costliest methods of producing crude at a time of lower prices. The buyers had contended that full ownership of the massive projects, which are designed to tap the world’s third-largest oil reserve for decades to come, would allow them to operate more efficiently and compete against other production methods.

“The results show that the strategy is working,” Canadian Natural President Steve Laut said in an interview. “It shows the strength and the sustainability of long-life, low-decline assets, and we’re staring to see the dividends being paid off that.”

Both of the Calgary-based companies showed progress on trimming expenses last quarter. Canadian Natural reduced operating costs at its Athabasca Oil Sands Project to C$24.60 ($19.20) per barrel of synthetic crude from C$27.50 in the second quarter. Cenovus trimmed its planned capital spending for this year by C$100 million with no expected effect on production.

Profits Beat

Canadian Natural posted profit of 19 Canadian cents a share, excluding some items, topping analysts’ 9-cent average projection. Cenovus’s profit of 28 Canadian cents a share beat analysts’ 10-cent average estimate. Suncor Energy Inc., Canada’s largest energy producer by market value, posted third-quarter earnings of 52 Canadian cents a share last week. That beat analysts’ projection of 34 cents, helped by the company’s Syncrude production rising to full capacity.

Cenovus rose 2.2 percent to C$13.30 at 1:40 p.m. in Toronto, after earlier climbing as much as 5 percent. Canadian Natural advanced 0.4 percent to C$45.23.

Canadian Natural’s acquisitions didn’t stop at the oil sands. The company followed its Athabasca purchase with a C$975 million takeover of Cenovus’s Pelican Lake heavy-oil project, announced in September. Canadian Natural also completed another phase of expansion at its Horizon mine and will ramp up production for the next two months. That project will add 80,000 barrels of daily production.

The Horizon expansion brings the company “into a period of much more meaningful free cash flow generation, with a larger and lower decline asset base,” Chris Cox, an analyst at Raymond James, said in a note. “This should position the company to continue growing the portfolio, while also aggressively paying down debt and accelerating cash returns to shareholders.”

For Cenovus, the Conoco deal has weighed on its shares as investors became concerned that the acquisition hurt its balance sheet, and the company spent last quarter selling off assets to pay down debt. Aside from the Pelican Lake sale to Canadian Natural, the company sold its Suffield assets to International Petroleum Corp. for C$512 million and last month reached a deal to unload its Palliser field to Schlumberger Ltd. and Torxen Energy for C$1.3 billion.

The C$2.8 billion in divestitures puts Cenovus in striking distance of paying off a C$3.6 billion bridge loan it took on for the Conoco deal. Cenovus still is marketing its Weyburn operation and has said it will consider selling other assets, such as gross overriding royalties and Deep Basin infrastructure.

To contact the reporter on this story: Kevin Orland in Calgary at korland@bloomberg.net.

To contact the editors responsible for this story: Reg Gale at rgale5@bloomberg.net, Carlos Caminada, Jim Efstathiou Jr.

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