In a bombshell press release this morning, Royal Dutch Shell (RDS/A) announced it was selling all of its oilsands mining operations in Canada. On the other side of the agreement, was Canadian Natural Resources (CNQ.TO, CNQ). The size of this deal is not portrayed in the price. The assets changing hands are massive. Just the 100,000 barrel Expansion 1 back in 2011 was huge.
A snippet of the size of these assets. The Expansion 1 project, at one point employed 10,000 people and was the largest construction project in Canada. That project was $14.3 Billion! That was only 40% of the production from AOSP. The existing Muskeg River mine was 155,000 barrels per day. This is a massive, massive project. As a comparison, about 5 new car factories could be built if they had to replace all 255,000 barrels with new capital.
Part of the $14.3 Billion for Expansion 1 was the Scotford upgrader which was included in this deal so without question, it's a massive win for CNQ. There is so much to this deal.
I am a little more involved in this outcome than most. I worked with Shell for 10 years. To see Royal Dutch Shell essentially sell off one of their major reserve pools in the world is a huge deal. I'll try to work through the intracacies in this article.
First, we are technicians so lets put up the charts and look at the companies involved in the deal. The Royal Dutch Shell (RDS/A) chart only goes back to 2005 after a significant restructuring changed the corporate setup. The long history of Royal Dutch Shell was erased at that time. Working from the top down, Shell pays a 6.26% dividend which is large. The SCTR shows the stock behaving better than 28% of all the large caps out there. While crude has been flat at $50-$55 between November and March 8, 2017, all of the oil stocks have been selling off. What is noticeable on Shell's chart is the 10 year support / resistance level at $55. The red line denotes Shell's most recent high at $55.42. The decline in volume has been noticeable since the crude bottom in January 2016. Lastly, the MACD has some negative divergence on the most recent high. The January 2017 MACD high was slightly lower than the July 2016 MACD high, while the January 2017 price was higher than in July 2016. The market cap of RDS/A is $212 Billion USD.
Looking at Canadian Natural Resources (CNQ.TO, CNQ), the chart shows something considerably different. CNQ pays a 2.82% dividend. The stock has also been range bound over the last 10 years with a red line demarcating the price of the most recent high. CNQ has continually bounced off the $28.50 $USD level for the past 10 months. In the past week, volume has accelerated substantially. Last week, CNQ had very high volume. With an average of 3.3 million shares a day, all of a sudden CNQ traded 24 million instead of 10 million shares over three days. Currently the weekly MACD is dropping below zero which is obviously bearish. The market cap of CNQ is $30 Billion. CNQ is roughly 15% the size of Shell based on market cap but will produce about 850,000 barrels/day after the deal.
As Canadian Natural Resources is a Canadian based company, let's look at the stock on the $TSX. The Canadian ticker is CNQ.TO. The SCTR for Canadian Natural Resources has been recorded on the Canadian ticker since StockCharts started the SCTR ranking system. For almost all of 2016, CNQ.TO was one of the top ranked stocks on the $TSX with an SCTR above 75 for most of the year. Looking at the price, the chart is shockingly different in Canadian Dollars. The ceiling at $46 has been there for 10 years. However, the stock had a 2:1 split in 2010. The adjusted chart below shows the same value for shareholders over time. Lastly, the MACD has gone below zero on the Canadian chart as well. Looking left on the chart, suggests that is never good!
First of all, the price levels in the deal are stunning to me.
Shell was the major shareholder in the AOSP (Athabasca Oil Sands Project).
- Shell owned 60%
- Chevron 20%
- Marathon oil 20%
The AOSP spent about $20 Billion to build the facilities (total includes Scotford upgrader) to get the total output to 255,000 barrels/day so Shell's portion was 150,000 bbls/day.
In a side deal as part of this, Shell and CNQ bought out Marathon's 20% for $2.5 Billion $USD. CNQ will own 70% of the AOSP on top of their Horizon Oilsands project in the Athabasca region. AOSP's 'oil in place' as a percentage was considered a crown jewel in the entire Oilsands area.
This is from a document discussing all the new development in the oilsands from back in 2007. Venture Magazine, March of the Megaprojects. Note the scale of the Expansion 1 project.
- Athabasca Oil Sands Expansion 1.
- Proponent: Albian Sands Energy Inc. represented by Shell Canada Limited (60%), Chevron Canada Limited (20%), Western Oil Sands L.P. (20%)
- Location: Oilsands leases north of Fort McMurray, Scotford Upgrader in Fort Saskatchewan
- Cost: Up to $12.8 billion
- Workforce: 6,000 at 2008-09 construction peak, about 700 operating jobs in Fort Saskatchewan and Albian Village in Wood Buffalo
- Timetable: All first-phase approvals received and construction underway; startup of mining late 2009.
- AOSP Expansion 1, the largest capital investment in Shell Canada’s history, is an integrated, 100,000-bpd expansion of oilsands mining and upgrading facilities. Shell says that AOSP 1 will effectively anchor the next four expansions, enabling it to hit minable bitumen production of 770,000 bpd while boosting upgrading capacity to 700,000 bpd.
It ended up with 10,000 people employed at one time and rounded up to $14.3 Billion!
My takeaway is the bottom line from 10 years ago. This project has land assets and reserves capable of getting to 770,000 bbls/day.
The big kicker is the length of the asset which can produce for a very long time.
Two articles from 2011 are interesting to see how the tides of time have changed Shell's thinking.
Here is an article, by the Financial Post in March 2011, where the majority of the document covers Shell's thinking after the Expansion 1, JackPine Mine was finished. Shell Bets On The Canadian Oil Sands.
Regarding the actual sale we are seeing today, a massive shift in staff and a retirement of previous leaders from the downturn in oil changed the Shell management team considerably. Today, the investment is behind them and the new team has no relationship with the history or the growth plan for the asset.
From Shell's press release: "In the full year 2016, the assets being divested to Canadian Natural recorded profits before tax of negative $22 million with upstream production averaging around 160 thousand barrels per day. For the year ended 31 December 2016, reserves associated with the assets being divested to Canadian Natural were 2 billion barrels and the gross assets at that date were approximately $12 billion. The transactions are estimated to result in a post-tax impairment of $1.3 to $1.5 billion, subject to adjustments."
Here is a link to Shell's website about the size and scale of the Athabasca Oil Sands Project.
The picture below shows the regions of 'heavy oil' in Alberta. CNRL bought great properties in this transaction from the Peace River basin and the Athabasca Oil Sands basin.
Yes, CNQ is buying 2 Billion Barrels in reserves and gross assets of $12 Billion on Shell's books for about 1/2 price. But the actual cost to build it all was much, much more. They are buying the Carmon Creek Project in Peace River and the Grosmont leases as well. The Grosmont leases are so remote, there is no road to the area. The Carmon Creek project in Peace River is a massive asset base that Shell has never been able to get behind fully. Recently, Shell cancelled the Carmon Creek project and stated that the lack of pipelines were the problem. Now, three pipelines look like they are coming out of Alberta with the TransMountain Expansion to 1,000,000 barrels per day, the Keystone XL link across the border looks possible and Line 9 to Minnesota got approved by the Canadian government. So the access to markets is starting to arrive as Shell walks out. Perhaps this investment thesis will change with CNQ being more local than the remote management teams in Houston and The Netherlands. CNQ has lots of assets already in the Peace River area. So Carmon Creek in the Peace River basin is a big add on for them. Remember that Shell already wrote down/off Carmon Creek so its actual cost base was much higher.
Check out this one line from the Shell Press Release:
"Shell and Canadian Natural have agreed that, subject to closing of the transactions and additional further conditions, Shell may swap its 50 percent purchased interest of MOCC for a 20 percent interest in assets of the Scotford upgrader and Quest CCS project. If the swap were to occur, Shell would fully exit AOSP’s mining operations and hold a 20 percent interest in the Scotford upgrader and Quest CCS project."
Shell would then have 20% of the upgrader and none of the oilsands mine. My oh my.
The Scotford upgrader was part of the sale to CNQ, which I find remarkable. CNQ bought 60% of AOSP from Shell and 10% from Marathon which gives them an additional 200,000 bbls/day of production! The quality of these assets are so good.
The reserves calculations are going to be interesting for RDS/A. This reduces Shell's North American reserves weighting significantly. I tried to find what was the massive surge in South American assets all in one year was, but gave up shortly after starting. I think the Carmon Creek write down was responsible for the Canadian drop in 2016.
While these projects are tight right now with oil around $50, the opportunity for CNQ has to be considered massive. While Shell flew back and forth From Houston and Holland to manage the projects, CNQ has oil sands assets already in the Horizon project in the Fort McMurray / Athabasca area and lots of existing assets in the Peace River neighbourhood. Now, they have massive reserves to build on for years.
Congratulations to CNQ.
Greg Schnell, CMT, MFTA.