Poor Stock Performance for CNQ – Where is it headed?

CNQ - Canadian Natural Resources

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, bitumen, and synthetic crude oil assets. 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.

Investment Data

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. It is also benefiting from its accretive acquisitions. The company recently completed the acquisition of Devon Canada Corp., which is expected to expand Canadian Natural’s existing thermal in situ and primary heavy oil operations.

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 transportation of heavy crude oil in international markets. Its oil sands mining and upgrading assets achieved record low annual cash production costs last year. The company registered a 12% production growth in 2018.

Some of Canadian Natural Resources’ projects like development of its Horizon oil sands mine, its vast thermal in situ opportunities and the expansion of the polymer flood project at Pelican Lake have resulted in its transition to a long life, low decline asset base which accounts for the majority of its sustainable free cash flow.

Candian 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. It has identified opportunities worth $680 million of investments in the latter half of 2019 which is expected to drive future value within its oil sands mining and upgrading, thermal in situ and conventional areas.

Dividends

Canadian Natural is a dividend aristocrat and has paid dividends regularly since 2001. It has returned nearly $9 billion to its shareholders in the last six years. The company raised its dividend for the 18th consecutive year growing them at 21% CAGR since inception. It also announced over $1.2 billion in share repurchases in 2018. Its dividend growth has been remarkable with 10-year average dividend growth of 20% CAGR. It sports an attractive average annual yield of 4.13% and a payout ratio of 61%. The company last raised its dividend by 12%.

Canadian Natural is targeting its 5-year production per share growth of 7.5% CAGR by 2022. The company’s assets are characterized by long life low decline base and low maintenance, which significantly reduces the capital outflow. 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.

Canadian Natural Resources should benefit from the favourable fundamentals around natural gas and opportunistic acquisitions. 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 Energy, Imperial Oil Ltd, Husky Energy Inc., and Cenovus Energy Inc. 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.

Bottom Line

Canadian Natural’s diverse and balanced asset base, capital flexibility, large portfolio of varied projects and a strong focus on efficient operations should continue to support the high dividend yield. The company is well positioned to benefit from its industry leading oil sands mining and upgrading focus, strong demand for natural gas and strategic acquisitions. A strong balance sheet, low capital maintenance requirements, strong asset base and large economies of scale should further support growth.

But where is the growth coming from? and what is the strategy overall? Is there a pivot or just the same? From a dividend income perspective, CNQ is attractive but from a stock growth, CNQ is not worth holding. Is this just another Suncor? The energy sector in Canada is definitely struggling with the challenges to get the products to customers.

CNQ vs SU vs Indexes

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.

 

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