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PrairieSky buying chunk of Canadian Natural Resources royalty holdings for $1.8B

CALGARY – Canadian Natural Resources Ltd. (TSX:CNQ) is selling most of its royalty land holdings to PrairieSky Royalty Ltd. (TSX:PSK) for $1.8 billion in stock and cash as it looks to strengthen its balance sheet in the face of low oil prices.

The friendly deal would see CNRL transfer 81 per cent of its royalty volume to PrairieSky, consisting of the equivalent of 6,700 barrels per day of oil and natural gas production, and about 21,850 square kilometres of royalty land — nearly four times the size of Prince Edward Island.

“This is truly a win-win deal,” said CNRL president Steve Laut in a conference call with analysts Monday, adding that shareholders of both companies will benefit from the combined strength and diversity of the assets.

Under the deal, PrairieSky would pay $680 million in cash and about 44.4 million of its common shares, priced at $25.20 each, for the royalty portfolio. The company says it has lined up investors to provide the $680 million in cash through a private placement of equity that’s expected to close by Dec. 2.

Desjardins Capital Markets analyst Justin Bouchard said in a note that while the sale will help CNRL insulate its balance sheet, it is “by no means a game-changer.”

The deal follows Cenovus Energy’s (TSX:CVE) sale of its royalty business for $3.3 billion in June to the Ontario Teachers’ Pension Plan as the company sought to shore up its finances.

Dundee Capital Markets analyst Chad Ellison said the deal should be positive for PrairieSky as the company picks up the “last high quality royalty asset” and should add to cash flow while also increasing the quality of the company’s portfolio.

The deal significantly adds to PrairieSky’s land holdings in the Viking light oil play in Saskatchewan and the Deep Basin natural gas prospects in Alberta and British Columbia, bringing the company’s total land holdings to about 59,500 sq. km in the three provinces.

CNRL said it has preserved the right to develop about 420 sq. km of land in western Saskatchewan through a leasing and drilling commitment with PrairieSky.

The agreement Monday came as PrairieSky, which was spun off last year from Calgary-based Encana (TSX:ECA), also announced its third-quarter financial results.

As with most other oil and gas companies, which have suffered from a plunge in global prices that began about a year ago, PrairieSky’s revenue and profit have plunged but its production has increased.

Its revenue in the three months ended Sept. 30 dropped to $44 million from $91.4 million in the same quarter last year, while net earnings were down to $14.1 million from $61.2 million. Production was up to 16,026 oil-equivalent barrels per day — primarily from natural gas — compared with 15,448 a year earlier.