NEW YORK ( The Deal) -- As part of its divestiture program to pay for a big acquisition, Oklahoma City oil and gas explorer Devon Energy (DVN - Get Report) said Wednesday it agreed to sell most of its Canadian conventional assets to Canadian Natural Resources Ltd. of Calgary, Alberta, for C$3.125 billion ($2.8 billion).
The properties had proved reserves of 170 million barrels equivalent at the end of last year. The sale doesn't include Devon's Horn River, Lloydminster and thermal heavy oil assets in Canada.
The transaction must clear Canadian regulators but is expected to close early in the second quarter. When it does, Devon expects to repatriate the proceeds to the United States to pay down debt taken on to finance its acquisition of Eagle Ford properties from Blackstone Group LP-backed GeoSouthern Energy Corp. in November for $6 billion.
Devon expects net proceeds of $2.7 billion after adjusting for currency exchange and taxes related to the sale and repatriation.
Devon said the divestiture process for its remaining non-core properties in the U.S. is "ongoing" and expects to complete it by year-end.
Devon CEO John Richels said in a statement that the agreement represents a significant step forward for its divestiture process. "This tax-efficient 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," he said. "Furthermore, the timely execution of the largest piece of our non-core divestiture process accelerates the refocus on core assets."
Tudor, Pickering, Holt & Co. Securities Inc. wrote in a note that the sale is a net positive, as the proceeds beat its expectations in size and timing, although it's still looking for more detail regarding divested assets.
In a separate statement, Canadian Natural said the acquired lands and production base are all in Western Canada in areas next to or near its current operations and are high quality, concentrated liquids-rich natural gas weighted assets with additional light crude oil exposure.
Canadian Natural said the properties had gross proved reserves, excluding royalty lands, of 272.2 million barrels of oil equivalent at the end of last year and produce 383 million cubic feet per day of natural gas, 10,800 barrels per day of light crude oil and 12,000 barrels per day of natural gas liquids with 72% operatorship. The deal also includes 2.2 million net acres of undeveloped land and 2.7 million net acres of royalty and fee simple lands, six majority owned and operated natural gas plants with gross processing capacity of 1 billion cubic feet per day and four majority owned and operated oil batteries.
The purchase also includes a royalty revenue stream that is targeted to earn $75 million in cash flow this year, Canadian Natural said. The company is reviewing options to combine the acquired royalty revenue stream with its own royalty revenue portfolio and creating a new vehicle to provide steady cash flow to shareholders or selling it later this year. The combined streams are expected to throw off $140 million to $150 million in cash flow this year.
Canadian Natural president Steve Laut said the acquisition fits the company's strategy of "opportunistically" adding to its core areas where it can provide immediate value and possibly add value in the future.
"The acquired assets are ... a very good fit with Canadian Natural's existing assets and infrastructure," he said, noting they will provide synergies once integrated. "The acquisition provides immediate value to shareholders through production and cash flow, is accretive in earnings, cash flow and returns and maintains our strong financial capacity to effectively execute our well defined plan."
Around 900 Devon Canada employees will be joining Canadian Natural, including field and head office personnel, Canadian Natural said.
Canadian Natural said it will maintain its strong financial position with sufficient balance sheet flexibility to accommodate the acquisition, noting that it negotiated an additional $1 billion committed term facility with the Bank of Montreal that's available at closing. It expects to exit this year with a debt to book capitalization of 30% to 31% and debt to Ebitda at 1.05 to 1.15 times.
Scotia Waterous was lead financial adviser to Devon on the transaction. BMO Capital Markets also advised Devon and provided a fairness opinion to its board and Osler, Hoskin & Harcourt LLP provided it with legal counsel.