A Member of Pat McKeough’s Inner Circle recently asked for his advice on an oil and natural gas producer with a multinational presence.
Pat likes the company’s high yield and shareholder-friendly policies toward free cash flow and debt reduction. The long track record of dividend increases is also a plus. However, Pat notes the firm’s results will fluctuate significantly based on highly volatile energy prices.
Canadian Natural Resources Ltd. (Symbol CNQ on Toronto; www.cnrl.com) is a producer of oil and natural gas in Western Canada, the U.K. sector of the North Sea and Offshore Africa. Overall, the product mix of its current 1.4 million barrels per day of production is about 74% oil and 26% natural gas.
The company has grown with some major acquisitions over the last few years.
Canadian Natural took advantage of “distressed” sales in early 2017, buying a 70% working interest in the Athabasca Oil Sands Project from Shell Canada and Marathon Oil. It also paid $12.7 billion to acquire 70% interest in the Scotford upgrader, which processes crude bitumen into synthetic crude oil.
In 2019, Canadian Natural bought most of the assets of Devon Canada Corporation for $3.8 billion. Devon’s high-quality land and production sites were located in Western Canada and were within Canadian Natural’s core areas. The asset base consists of both long-life, low decline oil sands production as well as conventional crude oil production. That output takes place on sites just adjacent to existing Canadian Natural assets.
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In 2021, the company completed its $960 million acquisition of Storm Resources (symbol SRX on Toronto). Storm was a natural gas producer with average daily output of 136 million cubic feet per day and 5,600 barrels of natural gas liquids, or NGLs.
Storm Resources has been a good fit for Canadian Natural. Its properties are located in the Montney natural gas formation of northern Alberta and B.C.; and its existing production and infrastructure complement Canadian Natural’s current holdings in the area.
Inner Circle: Both revenue and cash flow rise substantially for Canadian Natural Resources
On October 7, 2024, the company announced that it would acquire Chevron’s (symbol CVX on New York) Alberta assets, which include the oil and gas giant’s 20% interest in the Athabasca Oil Sands Project. With the purchase, Canadian Natural now has 90% working interest in the Athabasca Oil Sands Project. The 20% interest in ASOP also includes a 20% interest in the Muskeg River and Jackpine mines, the Scotford Upgrader, and the Quest Carbon Capture and Storage facility.
The acquisition adds 62,500 barrels per day of synthetic crude oil production. In addition, Canadian Natural has gained various working interests in non-producing oil sands leases that amount to 100,000 net acres.
Moreover, it has acquired Chevron’s 70% operated working interest in the Duvernay shale play. That’s expected to produce 60,000 barrels per day.
Canadian Natural will pay $6.5 billion U.S. The transaction is expected to close by the end of 2024.
Meanwhile, in the quarter ended June 30, 2024, the company’s revenue rose 14.7%, to $9.05 billion from $7.89 billion a year earlier. Revenue increased due to higher crude oil and NGL (natural gas liquids) volumes along with higher synthetic crude oil prices, partly offset by lower natural gas prices. Cash flow per share rose 35.2%, to $1.69 from $1.25.
Like all energy producers, Canadian Natural will need oil and gas prices to move even higher for it to keep reporting rising cash flow. But the company is well positioned to capitalize on those price climbs when they do occur; meanwhile, the shares trade at 6.3 times forecast 2025 cash flow per share of $7.68. That makes them reasonably cheap for investors looking to profit from a continued energy rebound. Canadian Natural shares also yield a high 4.4%.
Recommendation in Pat’s Inner Circle: Canadian Natural Resources Ltd. is okay to hold.
