Is CNQ a value investment?

CNQ - Canadian Natural ResourcesNow that the oil prices appear to have stabilized, it’s time to have a look at the energy sector. The top blue chip stock for the energy sector that surfaces in my dividend stock list is Canadian Natural Resources TSE:CNQNYSE:CNQ .

CNQ Summary

CNQ is in the energy business through light oil, crude oil and natural gas with production in North America, the North Sea, and the African coast. The different type of drilling/production create some diversification and can allow for Canadian Natural to manage its portfolio efficiently based on demand and pricing. It is worth noting that while it has drilling in the North Sea and the shores of Africa, North America represents the majority of its production and business.

CNQ Productions

 

By the numbers …

  • Market Cap.: $44.41B (CDN)
  • Dividends: $0.92 (CDN)
  • Dividend Yield: 2.26%
  • EPS: $3.58
  • Payout Ratio: 25.70%

At this point, CNQ is trading in the mid-range of its 52-week high and low. It can make a good entry point.

CNQ is Shareholder Friendly

CNQ has been kind to shareholders through their dividends and share purchase. It’s one of the few stocks on my list that manages to make the 10/10 list. A 10/10 stock is a stock that has increased dividends for the past 10 years with a 10% annual dividend growth. In fact, CNQ has a 24.57% CAGR dividend growth over the past 10 years with a 16.21% CAGR EPS growth. I prefer to see the EPS keeping up with the dividend growth but with CNQ’s payout ratio being at 25.70%, it’s clear that there is room to grow the dividend.

CNQ Dividend Growth

 

Another way to look at their dividend growth is to compare it against the EPS over time. When compared with the other large cap. energy stocks, only Imperial Oil (IMO) has a better dividend payout ratio. What I like about the graph is that while there have been spike in earnings, the management team did not get ahead of themselves by increasing the dividends too much. However, based on the lack of visible consistency in growing earnings, it’s clear that the payout ratio will not be any lower if they want to sustain the dividends or increase it. The 10-year average for the dividend payout ratio has been 16.21% with a visible increase over the last few years. While CNQ has significantly increased their revenues in the past few years, the oil prices will have an impact on profitability.

CNQ - Dividends vs EPS

Risks & Unknowns

It’s clear that the oil prices can have a major impact on the future of this company’s earnings since a lot of its business is tied to it. Any further decline would impact its bottom line. Earlier in the year, CNQ had already reduced its capital expenditure to 6.2B from 8.6B for the year.

Another factor to consider is that a low Canadian dollar currently benefits the company as sales are nearly all in US dollars. Major fluctuations in the currency would have an impact on their bottom line as well.

Final Thought

At this point, energy demand is not going down in any significant way and while natural gas prices have been low for quite a long period of time, CNQ has been able to grow its revenue. When compared with its peers, CNQ may be a good value buy at the current price range.

2015 is definitely a year to watch but since many producers sell ahead of time, it’s the 2016 revenues that need to be watched and scrutinized. As with other producers, the dividend is safe for 2015 and for CNQ to continue its dividend increase streak, it will need to increase the dividend in 2016 when the reality of low prices have hit the bottom line. It’s worth noting that the CDN dollar tends to follow the oil prices and CNQ may be able to offset the low oil prices due to the exchange rate. Canadian labor becomes cheap labor when you earn US dollars.

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.