When the price is right, it’s time to buy, even if you don’t need the assets. That was the rationale behind the decision of Calgary-based Canadian Natural Resources Ltd. to buy Anadarko Canada Corp. (ACC) for US$4.075 billion ($4.24 billion when including working capital adjustments).

During an August conference call, Canadian Natural President Steve Laut said his company wasn’t interested in ACC, which had been put on the market by Anadarko in late June (see NGI, July 3) with proceeds intended to fund Anadarko’s blockbuster acquisition of Kerr-McGee and Western Gas Resources (see NGI, Aug. 28; June 26).

Canadian Natural was approached and declined, thinking the price for ACC would be too rich, Laut told analysts during a Thursday conference call. After two or three weeks Canadian Natural was approached again with additional information and was shown the ACC data room. Finally, a deal was struck. Canadian Natural is still No. 2 in western Canadian land holdings, behind EnCana Corp., but the Anadarko deal brings it a little closer.

Laut said the ACC purchase reminds him of when in mid-2002 Canadian Natural picked up Rio Alto Exploration Ltd. through a merger that at the time created North America’s fourth largest gas producer (see NGI, May 20, 2002). Canadian Natural stretched for that deal, increasing its debt-equity from 41% to 47%, but the company was able to bring that metric down. It’s stretching again to buy ACC, but expects to be in the mid-40% area of debt-book capitalization targets in 2007. “We have a very strong, disciplined plan to get that balance sheet in order as we have done in other large acquisitions,” Laut said during the conference call.

Laut told analysts Canadian Natural does not need ACC to make its program work. But he said that with gas prices in a cyclical trough, now is a good time to pick up the assets. Rio Alto was a C$2.4 billion deal that occurred when gas was trading around C$2.00/gigajoule at AECO. Not long after gas was approaching C$9 at AECO. Previously, in 2000, Canadian Natural picked up Ranger Oil for about C$1.7 billion (see NGI, June 19, 2000) when gas was around C$3.00 at AECO. By early 2001 it was trading at C$12. Laut is looking at the strip and counting on riding ACC’s production out of the current price valley.

In the current market gas prices are under pressure, Laut said. Exploration and development costs are “overheated,” and service companies are at “full capacity,” which affects development. Laut touted the ACC acquisition for expanding Canadian Natural’s control of core natural gas growth areas and reducing its exposure to the overheated service market.

ACC’s land and production base are all in Western Canada and are concentrated natural gas-weighted assets with strong netbacks and long reserve life. The deal does not include Anadarko’s interests in the Mackenzie Delta and other Canadian arctic frontier properties. Current production, before royalties, from the working interests acquired by Canadian Natural, is approximately 358 MMcf/d of gas and 9,300 b/d of crude oil and NGLs. The assets also include 1.5 million net undeveloped acres and key strategic facilities in the high growth areas of Northeast British Columbia and Northwest Alberta, Canadian Natural said.

“This acquisition further strengthens Canadian Natural’s asset and production base in key operating areas specifically, in relation to natural gas,” said Laut. “This demonstrates the strength of the company’s balance sheet and our confidence in our ability to execute our defined plan, including Phase I of the Horizon Oil Sands Project, which remains on schedule and on track to budget targets.”

At the June 30 effective date of the sale, ACC produced 340 MMcf/d, 85% of which was natural gas. At year-end 2005, ACC had proved reserves of 262 MMBoe, 75% of which were proved developed. At Dec. 31, 2005 gas proved reserves of ACC were pegged at 1.56 Tcf, before royalties. Laut said he thinks Canadian Natural can grow that number to 2 Tcf and beyond.

The majority of the properties acquired by Canadian Natural are operated and located in or adjacent to Canadian Natural’s core areas in Northwest Alberta and Northeast British Columbia that are tightly held and very competitive, Canadian Natural said. These are also areas where Canadian Natural has a strong understanding of the geology and production performance. The ACC assets have more than 1,500 new drilling locations identified. The key infrastructure acquired will allow the low cost development of not only ACC lands but also adjacent Canadian Natural lands. Canadian Natural said it expects to achieve operating cost synergies with the full integration both companies’ infrastructure. Additional acreage in the Foothills further enhances the company’s long term deep natural gas growth plans.

By acquiring ACC, Canadian Natural gets current production of:

The ACC acquisition is positive for Canadian Natural shareholders, increasing cash flow by C24 cents/share in 2006 and C99 cents/share in 2007 on a strip pricing basis. The earnings impact is expected to be neutral. Based upon current crude oil and natural gas forward strip pricing, the company estimates its 2006 cash flow to be C$4.9-5.3 billion.

Canadian Natural has hedged a significant portion of its gas and crude oil production for 2007 and 2008 at prices that protect investment returns. The company will also consider divestiture of non strategic and non core properties but is in no hurry to do so, Laut said. “We’re under no time pressure to sell anything,” he said. “We’ll sell properties when we believe we can maximize value. I think we’ll look at selling some of the royalty interest first… it’s not really core to the company.”

In addition to the strategic location of the assets that ACC brings to Canadian Natural, it will allow the company to further high grade its project inventory and significantly reduce capital expenditures in the current highly inflationary service market. Canadian Natural expects, as a result of the acquisition, to reduce its 2007 conventional crude oil and gas capital budget by between C$800 million and C$1 billion, versus 2006 capital spending while maintaining the capital expenditures to complete Phase I of the Horizon Oil Sands Project. In April 2005 Canadian Natural said it would sell a “large” portion of its overriding royalty interests in several producing properties throughout Western Canada and Ontario for C$345 million to reduce long-term debt and to help finance the fledgling Horizon Project (see NGI, April 25, 2005).

The ACC transaction, which will be effected by the sale of stock in ACC, is subject to normal closing conditions and purchase price adjustments and is expected to close by the end of October. Anadarko’s transaction advisor for this sale is Tristone Capital Inc. and the company’s legal advisor is Stikeman Elliott LLP. Canadian Natural has retained Scotia Waterous to act as financial advisor. In addition, Citigroup Global Markets Inc, RBC Capital Markets, CIBC Capital Markets, and BMO Capital Markets have been retained as strategic advisors. The transaction is subject to normal closing conditions and governmental approval.

“This divestiture is an important step in refocusing the portfolio and reducing debt following our acquisitions of Kerr-McGee and Western Gas Resources in August, and we are pleased with the value and expediency of this preemptive transaction,” said Anadarko CEO Jim Hackett. Anadarko also is selling its Bear Head LNG Corp., which is developing a liquefied natural gas terminal at Point Tupper, NS, for $125 million (see NGI, July 17).

Anadarko gained entry into Canada in 2000 with the purchase of Union Pacific Resources (see NGI, April 10, 2000). After that, it upped its operating budget and acquired other key properties in Canada, including the strategic Berkley Petroleum Corp. (see NGI, April 2, 2001). However, when Anadarko began restructuring in 2004, it began to sell off some of the Canadian acreage (see NGI, Sept. 6, 2004).

Besides Western Canada, Canadian Natural has core operations in the United Kingdom portion of the North Sea and Offshore West Africa.

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