Canadian Natural Resources: Growth in the Oil Sands

05/21/2019 5:00 am EST


Gavin Graham

Chief Strategy Officer, INTEGRIS Pension Management Ltd

The outlook for Canadian producers with strong balance sheets and efficient production is probably as favorable as it's been for the last five years, suggests Gavin Graham, contributing editor to Internet Wealth Builder.

Lower costs of production for drilling and analysis due to the bear market, easier availability of labor, and lower accommodation costs have all helped companies keep a lid on costs. Meanwhile, the rebound in the oil price has seen earnings rise sharply over the last eighteen months.

Canadian Natural Resources (CNQ), is one of the largest Canadian E&P companies. It owns production facilities in western Canada, the North Sea, and offshore Africa.

In 2018, CNQ produced a record 820,778 barrels of oil per day (bbl/d) and 1,548 million cubic feet (Mcf) of natural gas. That works out to a 20% increase over 2017.

In Alberta, the Horizon Oil Sands and the Athabasca Oil Sands (acquired in 2017), produced 426,190 bbl/d, a 51% increase over 2017 due to Horizon Phase 3 coming on stream. The Athabasca acquisition had a record low operating cost of US$16.78 a barrel.

Meanwhile, Total (TOT), the operator of the South African field in which CNQ has a 20% interest, has recently announced a significant gas discovery.

Net earnings for 2018 were $2.59 billion ($2.13 per share) up 8% from 2017. On an adjusted basis, net earnings more than doubled to $3.26 billion ($2.68 per share). Cash flows from operating activities were up 39% to $10.12 billion and adjusted funds flow was $9.09 billion, up 24%.

CNQ reduced debt by $1.84 billion during the year. Moody's and S&P upgraded the company's debt ratings to Baa2 from Baa3 and to BBB/stable from BBB/negative.

On May 9, CNQ released first-quarter 2019 results. Earnings were off slightly from the year before, due to a small production decline. While basic net earnings were higher, the company reported adjusted net earnings from operations of $838 million ($0.70 a share, fully diluted). That compared to $885 million ($0.71 per share) in the same period last year.

Last year, the company paid out $1.56 billion in dividends, which were increased 22% from 2017 levels to $1.34 annually. Subsequently CNQ announced another 12% increase to $0.375 per quarter payable from April 1. This was the nineteenth consecutive year of dividend increases. The stock now pays $1.50 per share annually, to yield 3.95%.

CNQ repurchased $1.28 billion worth of shares in 2018 and continues to aggressively buy back stock. Share purchases in the first quarter totaled 6,650,000 at a weighted average share price of $36.24.

Subsequent to quarter-end and up to and including May 8, the company made additional share purchases of 4,050,000 at a weighted average share price of $39.34.

Trading at 17.9 times trailing 12-month earnings earnings, CNQ is reasonably valued. The company has a strong balance sheet, excellent management, and a sustainable and growing dividend. Buy.

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