Poor Stock Performance for CNQ – Where is it headed?

Canadian Natural Resources is a diversified and independent energy producer in the world. It is the largest independent natural gas and heavy crude oil producer in Canada. Canadian Natural Resources operates a large and diversified portfolio of assets in North America, the UK North Sea and Offshore Africa. It operates a balanced mix of natural gas, light crude oil, heavy crude oil, and oil sands. The company holds some of the best oil sands assets in North America, particularly thermal in situ properties, having tremendous growth potential. The company’s business can be broadly classified into – North America E&P, international, marketing and midstream. The North American Exploration and Production segment is Canadian Natural’s core business, while the other two businesses provide a nice diversification.

Canadian Natural operates a diverse portfolio of light crude oil, primary heavy crude oil, Pelican Lake crude oil and natural gas liquids. The company also owns midstream assets consisting of two crude oil pipeline systems and cogeneration plants, which enables the transportation of heavy crude oil in international markets.

Investment Data
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Revenue Growth & Market Exposure

With more than four decades of experience, Canadian Natural has developed an expertise in the operation of mature and low-risk basins, and ownership of extensive infrastructure. The company is a technology and innovation leader and has expended more than $3 billion in R&D activities since 2009. The company’s acquisition of Devon Canada is further expected to expand its existing thermal in situ and primary heavy oil operations. Canadian Oil Sands Mining and Upgrading projects are advantaged with long life, no decline, no reserve replacement cost or risk. Its gas assets are characterized by low emissions intensity and low costs. Canadian Natural continued to drive efficient operations, increased free cash flow and production growth, reducing its operating costs even under a curtailed production environment in Alberta. It is expecting a total of 190,000 barrels a day of additional egress capacity in 2020.

Canadian Natural Resources has compounded its revenue growth at more than 19% CAGR over the last three years. The company should gain from the tremendous development opportunities within its in situ oil sands asset portfolio. Canadian Natural’s asset base has lo w sustaining capital and low reservoir risk which allows it to effectively manage through commodity price cycles, with little impact on near term production levels. With the continued volatility in commodity pricing, Canadian Natural has announced to reduce its 2020 capital spending budget to ~$2,960 million, a $1,090 million reduction from its original 2020 budget. But the company has maintained its 2020 production guidance of 1.137M-1.207M boe/day, supported by low annual sustaining capital and the ramp-up of volumes at Kirby North, Primrose and Jackfish production.

Dividends

Canadian Natural is a Canadian Dividend Aristocrat and has paid dividends regularly since 2001. It has returned nearly $9 billion to its shareholders in the last six years and $2.6 billion in the last year. The company raised its dividend for the 20th consecutive year growing them at 21% CAGR since inception. Its dividend growth has been remarkable with 10-year average dividend growth of 20%+ CAGR. It sports an attractive average annual yield of more than 12% and a low payout ratio of 37%. The company last raised its dividend by 13%. The company bought back shares worth $941 million and paid dividends of $1.7 billion in 2019. Canadian Natural Resources maintained its dividend despite depressed oil prices. However, this dividend might be difficult to sustain at below $35/bbl.

Canadian Natural’s assets are characterized by long life low decline base and low maintenance, which significantly reduces the capital outflow and continues to generate significant free cash flow. In Q4, free cash flow was approximately $1 billion after net capital expenditures and dividends. A strong balance sheet further supports investment-grade credit ratings. Canadian Natural is planning to deploy 50% of its free cash flow (after dividends), towards strengthening its balance sheet while the balance 50% will be allocated towards share repurchases in the future. The company’s liquidity was approximately $5 billion at the end of March, which covers debt maturities over the next several years.

It reduced its capital program and also suspended its share buyback program in the current crisis situation. Management is expecting the company would sustain its production with a capital program of $3 billion and pay the dividend at WTI prices in the range of US$35/bbl to US$40/bbl.

Canadian Natural Resources’ adjusted cash production costs in 2018 were 43% lower than the 2014 level, and its debt also reduced to 2x EBITDA at the end of 2019 as compared to 3x in 2015. Canadian Natural is in a very strong position going forward even in the downside scenarios. A strong and balanced asset base, operations in both domestic and international markets, and ownership of a large network of pipelines form a strong moat around Canadian Natural’s business.

Competition

Canadian Natural competes with the likes of Suncor, Imperial Oil, Husky Energy Inc., and Cenovus Energy. Suncor Energy is the largest oil producer in Canada and one of the largest independent energy companies in the world while Imperial Oil is an integrated energy company, dealing in exploration, production, refining and marketing oil & gas and other petroleum products and Husky Energy is a Canadian integrated oil and gas company. Canadian Natural is able to keep its cost base low due to economies of scale and minimal capital cost requirements.

TickerKeyTickerCompanySectorIndustryScoreQuoteMarket CapP/EFPEEPSYield RawYieldPayoutRatioPaymentsDividendChowderGrowthRatingIncomeRatingTollboothAmbassadorAchieverAristocratKingCountryGraph
TSE:CNQCNQCanadian Natural ResourcesEnergyOil & Gas E&P0.5731.3737.050.000.00-0.500.05425.421.000041.700.161877IntermediateYESYESYESNOCanada1
TSE:TOUTOUTourmaline OilBasic MaterialsOil & Gas E&P0.3818.615.07100.09100.090.190.03013.012.947440.560.030132IntermediateNONONONOCanada1
TSE:OVVOVVOvintivEnergyOil & Gas E&P0.2818.124.710.000.00-16.280.02692.691.000040.380.026924IntermediateNONONONOCanada1
TSE:PSKPSKPrairieSky Royalty Ltd.EnergyOil & Gas E&P0.3211.042.5661.3561.350.180.06526.524.0000120.720.065224IntermediateNONONONOCanada1
TSE:ARXARXArc ResourcesEnergyOil & Gas E&P0.296.732.380.000.00-1.920.03573.571.000040.240.035714IntermediateNONONONOCanada1
TSE:WCPWCPWhitecap Resources Inc.EnergyOil & Gas E&P0.254.131.690.000.00-5.830.00970.971.000040.040.009723IntermediateNONONONOCanada1
TSE:CPGCPGCrescent Point EnergyEnergyOil & Gas E&P0.152.581.370.000.00-6.410.00390.391.000040.010.003912IntermediateNONONONOCanada1
TSE:VETVETVermillion EnergyEnergyOil & Gas E&P0.135.680.900.000.00-9.300.00000.000.0000120.000.013620IntermediateNONONONOCanada1
TSE:ERFERFEnerplus CorporationEnergyOil & Gas E&P0.273.590.800.000.00-5.160.03343.341.0000120.120.033414IntermediateNONONONOCanada1
TSE:FRUFRUFreehold Royalties LtdEnergyOil & Gas E&P0.275.190.620.000.00-0.070.03473.471.0000120.180.034714IntermediateNONONONOCanada1
TSE:BNEBNEBonterra Energy Corp.EnergyOil & Gas E&P0.041.690.060.000.00-8.900.00000.000.0000120.000.000000IntermediateNONONONOCanada1

Bottom Line

Canadian Natural is one of the largest oil producers in Canada with strong fundamentals and low-cost production. The company is well-positioned to weather the recession with its integrated assets, capital flexibility, a large portfolio of varied projects and a strong focus on efficient operations. The coronavirus situation and the Russian-Saudi oil price war has led to a sharp decline in Canadian Natural Resources’ stock price. The company is known for its safe dividend, large scale, and low-cost structure. It has maintained its production guidance given its long-life low-decline production base, low maintenance capital costs, and effective and efficient operations. Canadian Natural has a strong upside given its significant free cash flow due to quality assets. The company’s move to lower its capital expenditures and maintain production should boost future profitability amidst an oil price slump. A cut in capital expenditures should also support dividend payments in the future.

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