(Idea) Canadian Natural Resources
Note: Dollar references are to Canadian dollars unless otherwise specified.
Canadian Natural Resources (CNQ) is the largest and best-run E&P in Canada. The company was founded as a junior oil and gas producer in 1988 by Murray Edwards and Allan Markin. Since then, it has expanded primarily through intelligent acquisitions aimed at achieving a diversified, low-cost, and integrated production model. Its management structure is unique among E&Ps, with the company managed by a 22-person committee instead of by a single CEO. Nevertheless, it has demonstrated flexibility and decisiveness when necessary. During the 2014-2020 oil price downturn, CNQ acquired attractive oil and natural gas properties that will benefit its shareholders over the coming years.
The company has few negatives and a long list of positives, which include the following:
Total proved reserve volumes on a scale of international oil majors such as Shell (SHEL), BP (BP), and Chevron (CVX).
32 years of proved reserves at the current production rate, more than double that of CVE and SU.
The lowest corporate decline rate among the large Canadian oil sands companies.
A presence in eight of the ten lowest-cost conventional oil and gas plays in North America.
A dividend that has been paid annually for 23 consecutive years.
A 25% return on capital employed in 2022, one of the highest among large-cap E&Ps.
The highest return on capital employed over the last three years among the large Canadian oil sands companies.
Dividends of $4.34 per share and repurchases of $4.91 per share in 2022.
Planned 2023 production growth of 6% in 2023; 8% on a per-share basis.
At the moment, CNQ is returning 50% of cash flow after current dividends and capex in the form of share repurchases while using any remaining cash flow to pay down debt. Once its net debt is reduced to $10 billion, it plans to return 100% of free cash flow to shareholders as dividends and share repurchases.
CNQ’s Place in a Stock Portfolio
CNQ shares possess less upside to higher oil prices than other oil sands operators like MEG Energy (OTCPK:MEGEF), Suncor Energy (SU), and Cenovus Energy (CVE). For one, CNQ shares trade at a steep multiple to its oil sands peers. As a result, its shares won’t benefit nearly as much as MEG, CVE, and SU from multiple expansion, should it occur. We expect MEG, CVE, and SU to be rewarded with higher multiples as their results improve over the coming quarters and years. Their multiples also have greater room to move higher if the investing public regains confidence in the longer-term outlook for global oil demand. By comparison, CNQ—already renowned for its high quality—has considerably less upside from multiple expansion.