CANADIAN NATURAL RESOURCES Ltd (TSX:CNQ) company history: the story so far

History

Canadian Natural Resources built Horizon oil sands into a major producer, grew by acquisition, and in 2017 bought 70% of the Athabasca Oil Sands Project using new shares and debt.

2005-2010: Building Horizon

The record opens in February 2005 with Canadian Natural reporting record 2004 earnings of $1.4 billion and cash flow of $3.8 billion. On February 9, 2005 the board sanctioned the Horizon Oil Sands Project and booked 3.3 billion barrels of proved and probable bitumen mining reserves. Debt stood at 34% of book capitalization, and the quarterly dividend rose 12.5% to C$0.1125.

The record is then quiet until August 2008, when Horizon was starting up in stages. Its cost estimate rose about 8% to about $9.27 billion, roughly 36% above the original 2004 estimate of $6.8 billion. The company blamed schedule slippage in the upgrading plants and planned to start at about 60% of design rate.

By early 2010 Horizon was producing: 72,716 barrels a day of synthetic crude in January and 84,217 in February, with a target of 110,000 by mid-2010. In April 2010 the company renewed its buyback for up to 13,581,970 shares, 2.5% of the 543,278,782 then outstanding. In May shareholders approved a two-for-one share split.

2011-2014: New projects and the Devon deal

In March 2011 the company partnered with North West Upgrading on a bitumen refinery near Redwater, Alberta. Phase 1 would process 50,000 barrels a day, but it had not been sanctioned. In October 2012 a deal with Williams Energy Canada committed Williams to invest about $500-600 million to capture and market liquids from Horizon's waste gas.

In July 2013 the company agreed to buy Barrick Energy for about $173 million cash, though the record never confirms closing. In September 2013 it farmed out its offshore South Africa block to Total, which took 50% and operatorship and would carry the first exploration well up to US$150 million. In November 2013 the dividend rose 60% to C$0.20 a quarter.

The largest step came in February 2014, when the company agreed to buy Devon Canada's conventional assets for $3.125 billion cash, backed by a new $1 billion Bank of Montreal term facility. It closed on April 2, 2014. In November 2014 the 2015 budget set capital at about $8.6 billion and production at 869,000-916,000 barrels of oil equivalent a day.

2015-2016: Selling the royalties and pipeline

In December 2015 the company combined its royalty business with PrairieSky Royalty, receiving 44,444,444 PrairieSky shares, 19.5% of that company. It had agreed to distribute enough of them to own under 10%. In June 2016, after over 99% of shareholders voted in favour, it distributed 0.02 of a PrairieSky share for each Canadian Natural share.

In December 2016 it sold its Cold Lake Pipeline interests to Inter Pipeline for $350 million cash plus 6,417,740 Inter Pipeline shares, about $527.5 million in total, keeping access to the pipeline. The sale came with firm capacity for Kirby North, an oil sands project now restarted with first production targeted for Q1 2020.

2017: The oil sands acquisition

In March 2017 the company agreed to buy 70% of the Athabasca Oil Sands Project and other assets from Shell and Marathon Oil for $12.74 billion. Payment was 97,560,975 new shares to Shell, $8.24 billion cash and a deferred US$375 million to Marathon due in Q1 2018. Funding included $9 billion of committed financing, a $3 billion term loan and up to $6 billion bridge to bonds.

The deal closed on May 31, 2017, with Chevron at 20% and Shell at 10%. The company became operator of the mines from June 1, 2017 and expected June mine output of 173,000-191,000 barrels a day, plus 12,000-14,000 from Peace River properties. As of November 2017, the company targeted debt of about 41% of book capitalization by year end and had the Marathon payment still to make.

Written from the 18 story beats below (2005 to 31 May 2017), which come from the company's own announcements and filings.

Beat by beat

The events that changed the company's story, in plain English, each written against everything known about the company at the time. The dot shows whether it was good, bad or neutral for shareholders.

2017

31 May
The company completed the oil sands acquisition announced on March 9, 2017, giving it 70% of the Athabasca Oil Sands Project, with Chevron at 20% and Shell at 10%. Consideration was 97,560,975 new shares to Shell, $8.24 billion cash before adjustments, and a deferred US$375 million to Marathon Oil due Q1 2018. It becomes operator of the AOSP mines from June 1, 2017, and expects June mine production of 173,000-191,000 bbl/d plus 12,000-14,000 bbl/d from the Peace River properties.
business combination
9 Mar
The company agreed to buy a 70% stake in the Athabasca Oil Sands Project (including 70% of the Scotford upgrader) plus other oil sands assets from Shell and Marathon Oil, for a total of $12.74 billion. Payment is 97,560,975 new Canadian Natural shares to Shell (about $4 billion), $8.24 billion cash before adjustments, and a deferred US$375 million to Marathon Oil in Q1 2018; closing is targeted for mid-2017, subject to approvals. It is funded by the share issue plus $9 billion of committed financing ($3 billion term loan and up to $6 billion bridge to bonds), and the company targets debt to book capitalization of about 41% and debt to EBITDA of about 2.4x at end-2017. Existing shareholders would be diluted by the new shares.
business combination

2016

16 Dec
The company completed the Cold Lake Pipeline sale to Inter Pipeline announced four days earlier, receiving $350 million cash and 6,417,740 Inter Pipeline shares (ascribed value $177.5 million, about $186.6 million at the December 15 close), for about $527.5 million in total (about $536.6 million at the December 15 close), subject to closing adjustments.
asset acquisition disposition
12 Dec
The company agreed to sell its 15% interest in Cold Lake Pipeline Ltd. and 14.7% interest in the Cold Lake Limited Partnership to Inter Pipeline for $350 million cash plus 6,417,740 Inter Pipeline shares valued at $177.5 million (about $527.5 million total), targeted to close in 2016. It expects an after-tax gain of about $200 million (preliminary) and says it keeps access to the pipeline. Alongside the sale it secured firm Inter Pipeline capacity for Kirby North, which the filing says has been reinitiated, with first production now targeted for Q1 2020, later than the earlier Q4 2016 first-steam target in the context.
asset acquisition disposition
9 May
The company set out the terms for distributing PrairieSky shares to its own shareholders: 0.02 of a PrairieSky share for each Canadian Natural share, or a cash equivalent depending on number of shares owned. More than 99% of shareholders voted in favour on May 5, 2016, the final court order was obtained May 6, with a record date of June 3 and effective date of June 6, 2016. This carries out the share distribution promised in the December 2015 royalty combination.
business combination

2015

17 Dec
The company completed the combination of its royalty business with PrairieSky Royalty, receiving 44,444,444 PrairieSky shares (deemed price $25.20 each, 19.5% of PrairieSky) as partial consideration. This resolves the open question from 2014 about what to do with the royalty stream: the company has agreed to distribute enough shares to shareholders by December 31, 2016 (by dividend or return of capital, subject to approvals) to own under 10%, and intends to distribute the majority at or near its May 2016 annual meeting. Until then it agreed not to sell the shares, with limited exceptions. The filing does not state the cash portion of the price.
business combination

2014

7 Nov
The board declared a quarterly dividend of C$0.225 per share, payable January 1, 2015 to holders of record on December 12, 2014, unchanged from the prior quarter. The same filing carries the 2015 budget: capital of about $8.6 billion, production targeted at 869,000-916,000 BOE/d (about 11% growth at the midpoint of 893,000), cash flow of about $9.4 billion and free cash flow of about $800 million, based on WTI of US$81/bbl. It says Horizon Phases 2 and 3 are on schedule and within original cost estimates toward 250,000 bbl/d by late 2017, with Phase 2B targeted for late 2016, and Kirby North Phase 1 (40,000 bbl/d, $1.45 billion total) has first steam targeted for Q4 2016. Horizon is planned to have a 35-day maintenance turnaround in Q3 2015. The budget figures are targets and depend on the oil price assumption.
dividend declaration
2 Apr
The company announced it completed the Devon Canada asset acquisition announced in February (the $3.125 billion deal). It will integrate the assets immediately and welcomes Devon staff. The release gives no new financial figures, so the final price paid is not stated here.
business combination
19 Feb
The company agreed to buy Devon Canada's Canadian conventional assets (excluding Horn River and the heavy oil properties) for $3.125 billion cash, effective January 1, 2014, with closing targeted for April 1, 2014. The assets produce about 383 mmcf/d of gas, 10,800 bbl/d of light crude and 12,000 bbl/d of NGLs, with 272.2 million BOE of proved reserves and about 900 Devon employees joining. A new $1 billion committed term facility with the Bank of Montreal is available on closing, and the company targets debt to book capitalization of about 30-31% at end of 2014. It also plans to either spin the combined royalty stream into a new vehicle or sell it later in 2014. This is a much larger deal than the 2013 Barrick Energy purchase (about $173M), and it is subject to government approval.
business combination

2013

7 Nov
The board raised the quarterly dividend 60%, to C$0.20 per share from C$0.125, payable January 1, 2014 to holders of record on December 13, 2013. The filing attributes this to confidence in executing its growth plan and the sustainability of its free cash flow, and calls it the fourteenth consecutive yearly increase.
dividend declaration
30 Sept
The company completed a farm-out of Block 11B/12B offshore South Africa to Total E&P South Africa BV, which gets a 50% working interest and becomes operator. In return the company received an undisclosed upfront cash payment, recovery of 50% of past costs, and a carry on the first exploration well up to US$150 million gross cost; that well is targeted for 2014. More payments are due if exploration succeeds and the block is developed. This is a new partnership for the company's offshore Africa portfolio.
farm in farm out agreement
24 July
The company agreed to acquire Barrick Energy Inc., a Barrick Gold subsidiary, after BEI sells certain assets, for about $173 million cash plus a gross overriding royalty on certain lands at Nipisi. The assets are light oil properties in Alberta producing about 4,200 bbl/d of light crude and NGLs and 4.4 million cubic feet per day of gas, plus about 92,160 net acres of unproved land at Nipisi. Closing is targeted for July 31, 2013 and funding will come from operating cash flow and bank facilities.
business combination

2012

3 Oct
The company signed a long-term gas processing agreement with Williams Energy Canada, which will invest about $500-600 million to extract and market natural gas liquids and olefins from the Horizon upgrader's offgas, giving the company methane back as fuel. The offgas capture is targeted to cut emissions by about 200,000 tonnes per year of CO2 and 2,000 tonnes of sulphur after Horizon's targeted expansion to about 250,000 bbl/d. Separately, planned Horizon maintenance moved from late Q3 into October, starting October 11, 2012 and targeted to take twelve days with production curtailed; 2012 Horizon guidance of 90,000-98,000 bbl/d is unchanged. This is a new environmental thread and continues the Horizon expansion plans.
regulatory community update

2011

3 Mar
The company signed a partnership agreement with North West Upgrading Inc. to move forward with detailed engineering for a bitumen refinery near Redwater, Alberta. The partnership also agreed to process bitumen supplied by the Government of Alberta under its royalty-in-kind program. Phase 1 would process 50,000 bbl/d if the project is sanctioned after detailed engineering, and the company has agreed to supply 12,500 bbl/d of bitumen. This is a new thread; no sanction has been given yet and no cost is stated.
regulatory community update

2010

10 May
Shareholders approved a two-for-one share split at the May 6, 2010 meeting, to be issued on or about May 28, 2010 to holders of record on May 21, 2010. The board declared a dividend of C$0.15 per pre-split share, equal to C$0.075 after the split, payable July 1, 2010 to holders of record on June 11, 2010. Each share becomes two, so the per-share dividend halves while the pre-split C$0.105 figure is not directly comparable. The previous quarterly dividend of C$0.105 appears from the earlier filings; the C$0.15 pre-split figure would be an increase from it (inference).
dividend declaration
1 Apr
The company renewed its share buyback for April 6, 2010 to April 5, 2011, allowing purchase for cancellation of up to 13,581,970 shares (2.5% of the 543,278,782 outstanding at March 17, 2010) at market price. Whether any shares are bought is at the company's discretion. The filing also carries Horizon synthetic crude output: 72,716 bbl/d in January 2010 and 84,217 bbl/d in February, with March forecast at 100,000-105,000 bbl/d. The company still targets reliable production of 110,000 bbl/d by mid-2010, so Horizon is now producing after the start-up described in 2008.
security holder rights change

2008

12 Aug
The board declared a quarterly dividend (the amount is cut off in the text provided; the exhibit is dated August 7, 2008). The same filing carries the Q2 2008 Horizon update: staged start-up has begun, with first bitumen crude targeted for early September and first light sweet synthetic crude in the sales pipeline targeted for Q4 2008. The total Horizon cost estimate rises about 8% (about $525 million) to about $9.27 billion, about 36% above the original 2004 $6.8 billion estimate and up from $8.74 billion. This continues the cost-overrun thread from 2007 (5-12% over), with costs now well above that range. The company cites schedule slippage in the upgrading/hydrotreating plants and says Units 41 and 43 are delayed beyond Q3. It plans to start at about 60% of design rate until the distillate hydrotreater is commissioned.
dividend declaration

2005

28 Feb
The board declared a quarterly dividend of C$0.1125 per share, up from C$0.10 (a 12.5% increase), payable April 1, 2005 to holders of record on March 18, 2005. The filing also carries 2004 results: record annual earnings of $1.4 billion and cash flow of $3.8 billion, and the board's February 9, 2005 sanction of the Horizon Oil Sands Project, which resolves the 2004 open question of whether Horizon would be approved. With sanction, 3.3 billion barrels of proved and probable bitumen mining reserves were booked, and debt to book capitalization was 34%.
dividend declaration