PrairieSky Royalty

PrairieSky Royalty* (PSK : TSX : $38.77), Net Change: 0.11, % Change: 0.28%, Volume: 279,422
EnCana* (ECA : TSX : $26.33), Net Change: -0.30, % Change: -1.13%, Volume: 3,288,463
Canadian Natural Resources* (CNQ : TSX : $48.57), Net Change: 0.76, % Change: 1.59%, Volume: 5,154,591
Cenovus Energy* (CVE : TSX : $34.16), Net Change: 0.27, % Change: 0.80%, Volume: 3,472,188
A TOUGH ACT TO FOLLOW. PrairieSky Royalty’s market debut has been incredible, shares have now risen nearly 37%
above its initial public offering price of $28.00 per common share. The success of PSK has forced the likes of Canadian Natural Resources and Cenovus to have a second look at their royalty lands.

According to Canaccord , the PSK read-through for CVE’s royalty lands, should the company decide to do a spinout, is ~$2.8 billion and $3.70/share (by land value). It would be $2.3-2.5 billion or ~$2.20/share for CNQ’s royalty lands. Some more “timbits” from both companies this emerged last week.

At its investor day last Tuesday, CNQ President Steve Laut said (as quoted by The Calgary Herald), “Right now we’re in the process to make sure we understand what we have and then we’re going to evaluate all the options including the PrairieSky option…Obviously, it looks attractive but we’re going to evaluate all the options and
whichever creates the most value for shareholders, that’s the one we’ll choose. And we’ll do that by the end of the year.”

With respect to CVE, the company was recently marketing overseas with another Bay Street broker. One takeaway from the meetings was CVE is not in any rush to monetize its third party royalty production. Recall, the company did state on its Q1/14 call that there were no “current” plans to change the nature of how it owns the lands but it has the obligation to maximize value and planned to monitor how other transactions proceeded

Canadian Natural Resources Ltd.

CNQ : TSX : C$40.63

CNQ : NYSE
BUY  Target: C$46.0

COMPANY DESCRIPTION: Canadian Natural is one of the largest independent crude oil and natural gas producers in the world with a diversified and balanced asset base of natural gas, heavy oil, oil sands and light oil.
All amounts in C$ unless otherwise noted.

COMPANY DESCRIPTION: Canadian Natural is one of the largest independent crude oil and natural gas producers in the world with a diversified and balanced asset base of natural gas, heavy oil, oil sands and light oil.
All amounts in C$ unless otherwise noted.

Energy — Oil and Gas, Exploration and Production ADDING SIGNIFICANT PRODUCTION AT A LOW COST

We reiterate our BUY rating on CNQ post yesterday’s announcement to acquire Devon Energy’s (DVN : TSX| Not rated) Canadian conventional asset package (ex- Horn River basin and heavy oil properties) for $3.12 billion for the following reasons:
While, we were surprised by the move, CNQ did take advantage of the “buyers” market in Canada. It is evident there are plenty of asset packages on the market; recall CNQ retracted its own Montney package on 1/9 due to lack of sufficient interest. To that end, the company paid ~$36,000/boe/d unadjusted ($30,300 per boe/d adjusted for infrastructure), which looks like a steal compared to precedent transactions of ~$51,700/boe/d especially given the higher gas price environment.
The transaction is also accretive on a cash flow basis. To that end, we estimate that CNQ is paying 4.5x 2015E DACFs (when adjusted for infrastructure), which is a discount to the 5.4x that CNQ was trading at prior to yesterday.
Potential spin out of royalty assets. The company plans to either monetize or spin out the combined $140-$150 million annual cash flow royalty free lands post acquisition. Based on Freehold Royalty Trust’s (FRU: TSX | Not rated) current trading multiple, this asset is worth an estimated $1.2-1.3 billion or $1.08-1.16/share.
Balance sheet still looks strong post acquisition. At our price deck, debt/EBITDA is estimated to be 1.13x vs. the peer average of the same level, and CNQ’s pre-acquisition metric of 0.93x.
Still the torque play in the Sr’s space on our positive heavy oil thesis. We estimate the company will still be ~40% levered to heavy oil in H2/14 (down slightly from the prior ~45%), and thus will continue to benefit from our thesis on narrowing differentials.
We are increasing our target by $1 to $46 to reflect the accretion from the acquisition

Canadian Natural Resourses Target $47

Canadian Natural Resources Limited

Canadian Natural Resources Limited (Photo credit: Wikipedia)

Canadian Natural Resources Ltd. 

May 17 2012

CNQ : TSX : C$29.33  Buy , Target C$47.00 

  • Investor Day Highlights 

1)    the improvements seen at Horizon due to the 3rd Ore Preparation Plant (OPP); 

2) an improved outlook for production growth in Primary Heavy Oil and North American Light Oil vs. what the company disclosed at last year’s event (albeit it included higher capex); and  

3 )increased coking capacity in the US that is expected to come on line in 2013.  

Seeing improvements at Horizon since the recent re-start: The 3rd OPP has increased availability from 72% in January to 98% in April (March was 96%). As a result, May month-to-date has averaged 116 MBbl/d, which is up from the 111.4 MBbl/d average for April. Of note, CNQ sees the ability to meet or exceed the top end of its 2012 guidance range of 85-95 MBbl/d. To meet low end, Horizon needs to achieve only ~80% reliability (97.9 MBbl/d based on a 123 MBbl/d stream day rate) for the rest of the year. To meet the high end: Horizon needs to achieve ~90% reliability (111.2 MBbl/d) for rest of year.

CNQ updated its 4+ year production growth outlook by area, and net/net there was a positive revision (with increased costs due in part to increased well count, but a part that shows up in thermal is unidentifiable to us): CNQ raised its production growth expectation for North American Light Oil to 11% CAGR (to about 85 MBOE/d by 2015) from the 7% (to ~65 MBOE/d by 2015) stated last year.

For Primary Heavy Oil, CNQ increased its expectations to where it sees the potential to reach ~150 MBbl/d by 2016 vs. the 130 MBbl/d to be reached by 2014 (and decline thereafter) stated at last year’s Investor Open House. For Pelican Lake, however, it appears CNQ sees ultimate potential to 60 MBbl/d vs. the 70 MBbl/d minimum discussed last year.

For 2013, it looks as if CNQ is guiding for about 715 MBOE/d, which is ahead of our ~700 MBOE/d estimate but in line with the Street’s 713 estimate. Gas prices are a swing factor in the 715 MBOE/d.

2013 will see 310 MBbl/d of incremental heavy oil refining capacity: Specifically, Marathon is adding at its Detroit refinery 80 MBbl/d of Heavy Oil Capacity (while displacing 70 MBbl/d of light capacity) and BP is adding at Whiting 230 MBbl/d of heavy oil capacity (displacing 230 MBbl/d of light capacity). Combined, this adds ~20% new heavy oil capacity to existing total Canadian heavy oil markets, per CNQ.

 TARGET PRICE CALCULATION 

Our $47 target price is based on 4.75x ex-oil sands 2013E DACF plus over $25/share of estimated risked oil sands value. Our target implies the stock could  ultimately trade at 7.2x 2013 EV/DACF. The stock currently trades at 5 x

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