Did Canadian Natural Resources Ltd Get a Greasy Deal?

Last Wednesday, Devon Energy (NYSE: DVN  ) announced that it reached an agreement to sell most of its Canadian assets to Canadian Natural Resources (NYSE: CNQ  ) for $2.8 billion. This marks the largest acquisition by a Canadian energy company since 2009 and comes at a time when M&A activity seems to be heating up in the energy sector. On February 6, Baytex Energy Corp (NYSE: BTE  ) announced that it had reached an agreement to purchase Aurora Oil and Gas Ltd for $2.6 billion Canadian.

What Devon Energy gets
Devon Energy is planning to use the proceeds of the sale for repayment of debt related to its recent $6 billion purchase of GeoSouthern Energy Corp's Eagle Ford assets . The sale is in line with Devon Energy's strategy announced last November to divest non-core assets and focus on maximizing potential of its core assets. John Richels, President and CEO of Devon Energy stated that, "the agreement represents a significant step forward in the execution of Devon Energy's non-core divestiture process."

Devon Energy recently reported a fourth quarter profit of $207 million, or $0.51 a share, compared with a year-earlier loss of $357 million, or $0.89 a share, due to increased production and higher average selling prices for oil and natural gas. The company achieved 32% growth in fourth quarter U.S. oil production and increased proved oil reserves to the highest level in company history. During 2013, the company repatriated $4.3 billion of foreign cash to the U.S. at an estimated effective tax rate of 4%. As of December 31, 2013, the company's cash balances totaled approximately $6.1 billion with total debt of approximately $12 billion. The sale of Devon Energy's Canadian assets will provide Devon Energy with cash to pay down debts as they have been aggressively buying assets.

What Canadian Natural Resources gets
For Canadian Natural Resources the purchase provides it with concentrated liquids-rich natural gas weighted assets, with additional light crude oil exposure that is close to its existing operations. Canadian Natural Resources estimates that the deal adds 11% production at 6% of enterprise value. 

The acquisition also includes six natural gas plants with gross processing capacity in excess of 1,000 mmcf/d, and four oil batteries. The acquisition is estimated to add 272.2 million barrels of oil equivalent to Canadian Natural Resources' proved reserves and includes a royalty revenue stream that is targeted to earn approximately $75 million in cash flow during 2014. Canadian Natural Resources has suggested that they may combine this royalty revenue with their own royalty portfolio for a possible monetization transaction in 2014.

The main concern for investors is that Canadian Natural Resources may have overpaid for these assets. RBC Capital Markets analyst Scott Hanold said in a note to clients, "We had expected an after-tax range of $2-3 billion," which suggests that Canadian Natural Resources paid on the high end of estimates. Devon Energy's CEO, John Richels commented that the transaction provides for "a clean exit from our Canadian conventional business at a value of nearly 7 times 2013 EBITDA, a substantial premium compared to Devon's current trading multiple."

Foolish takeaway
The deal looks to be a good one for Devon Energy as it provides them with a substantial amount of cash to pay down debt they took on when they purchased the Eagle Ford assets. Devon Energy's strategy of divesting non-core assets should pay off as it will provide cash and allow Devon Energy to focus on maximizing their most important assets. For Canadian Natural Resources, the deal makes sense as the properties acquired are close to existing operations. However, Canadian Natural Resources has paid a high price to obtain these properties, and if the price of natural gas falls it may find it has paid too much.

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