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2 oil & gas stocks; 1 to buy; 1 to sell

Here are two oil and gas stocks from our survey of analysts’ opinions of more than 1,000 Canadian public companies. One tops the “buy” list; the other the “sell” list.

Canadian Natural Resources Ltd. (TSX—CNQ; NYSE—CNQ)

Canadian Natural Resources’ oilsands mining segment is driving much of its cash flow and free cash flow generation, says RBC Capital Markets analyst Greg Pardy.

Anchored by an extensive proven and probable reserve life index of just over 45 years, oil and gas stock Canadian Natural’s oilsands mining operations yield premier upgraded products, with no decline, and about $1 billion of annual sustaining capital. At 2019’s end, the company’s proven and probable synthetic crude oil reserves stood at 6.9 billion barrels.

“Over the 2018-19 period, we estimate the oilsands mining segment generated pre-tax cash flow of $12.8 billion, and free cash flow of $9.8 billion,” says Mr. Pardy. “Our inspection would suggest the company’s oilsands mining generated operating net-backs, after transportation costs, that were about $10-to-$15 per barrel of oil higher than Syncrude and other comparable projects in 2018-19.”

The analyst pegs the company’s oilsands mining free cash flow at $2.1 billion in 2020 and $4.1 billion in 2021. Sustaining capital sits in the range of about $6-to-$8 per barrel of oil, or around $1 billion per year for this segment.

Moreover, Canadian Natural has set a long-term aspirational target of net zero oilsands emissions. During the interim, the company is targeting a 25 per cent reduction in oilsands greenhouse gas emissions intensity by 2025.

Thus far, strong progress has been made at Horizon, where the company has reduced emissions intensity 37 per cent since 2012.

In addition, strides are being made with the In-Pit Extraction Process (IPEP). IPEP replaces the traditional bitumen extraction process in oilsands mining by handling the bitumen directly at the mine face.

If successful, the company believes IPEP has the potential to reduce mining costs by $2-to-$3 per barrel of oil, significantly reduce greenhouse gas emissions and importantly, eliminate the need for tailings ponds.

Mr. Pardy reaffirms his “outperform” recommendation underlining that the company is on RBC’s “Global Top 30” and “Best Energy Ideas” lists.

All seven analysts who cover Canadian Natural Resources recommend it as a “buy”, placing it in a five-way tie for first on our top-10 “buys” list.

Calfrac Well Services Ltd. (TSX—CFW)

Following restructuring, Calfrac Well Services Ltd.’s debt has been sawed down by 60 per cent, but by Raymond James Financial analyst Andrew Bradford’s measure, earnings before interest, taxes, depreciation and amortization (EBITDA) still won’t cover cash interest or maintenance capital.

Nonetheless, Mr. Bradford says the recapitalization does provide a path to a more sustainable debt burden and operating leverage in the event of some resumption in normal field activity.

Mr. Bradford notes that floating capital will be thin initially, or at least undefined. Almost all (94.3 per cent) of the $338-million pro forma market cap will be collectively held by insiders, in large blocks and by prior unsecured note-holders—another 1.7 per cent by Wilks Brothers LLC. Initially, the effective float capitalization could range anywhere between $10 million and $328 million, depending on the Wilks’ and former unsecured note-holders’ intentions.

The analyst says investors need to be mindful that the market cap and net debt, if presented in terms of a basic starting offer, will understate the dilutive impact of Calfrac’s deep-in-the-money 1.5 lien convertible debt and potential interest in-kind. “International Financial Reporting Standards (IFRS) will present the 1.5 lien debt on the company’s financial statements in its usual confused fashion with loose attachment to economic relevance, so we describe it here in simple terms,” says the analyst. “The undiscounted value of this debt is a $60-million principal plus $18 million over three years in interest.

“However, upon conversion to shares and interest in the form of shares in kind, the market value of the 1.5 notes is between $417 million and $555 million.”

The analyst reiterates his view that US oilfield services activity is lower than one should expect given oil and gas strip pricing. In Canada, producers will be supportive of maintaining a healthy competitive fracturing dynamic given higher demand, he adds.

Mr. Bradford reiterates his “under-perform” recommendation and target share price of $0.08 for Calfrac. All three analysts who cover Calfrac Well Services recommend it as a “sell”, placing it first on our top-10 “sells” list.

This is an edited version of an article that was originally published for subscribers in the November 20, 2020, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.

Investor’s Digest of Canada, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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