Here are two oil and gas stocks with strong cash flows that will outperform their peers.
RBC’s Greg Pardy says investors looking to the sky for energy plays, should keep their eye closer to the ground–where the money is.
Investors who can only remember conventional energy’s recent doldrums and would rather search the skies and other renewable energy sources for profits may want to look closer to the ground, where the money is.
So argues Toronto stock analyst Greg Pardy, head of global energy research for RBC Capital Markets. Previously he served as a managing director at Scotia Capital.
Mr. Pardy names two domestic stalwarts of the energy industry as his favourites among the companies he covers: Canadian Natural Resources Ltd. (TSX—CNQ; NYSE—CNQ) and Enerplus Corporation (TSX—ERF; NYSE—ERF), in large part on the basis of their strong cash flows. He says both companies will “outperform” peers.
It may seem an eternity ago, but even before COVID was a pandemic, in February 2020, the companies working in Canada’s oilsands and oilfields were in trouble.
On one hand, they faced a lack of transport capacity and thus access to markets, while on the other, foreign oil producers resolved to increase their own output and caused a supply glut, all of which conspired to push prices down.
When the health crisis took hold a few weeks later, the price of Canadian oil collapsed outright, to the lower teens; at the gas pump, drivers were treated to 1990s-level prices and even, in some cases, negatively priced fuel.
As of May 20, however, the Western Canadian Select (WCS) crude price stood at US$48.95 per barrel, a small dip from the March 2021 average of US$50.94 a barrel, a staggering 296.7 per cent higher than in March 2020 according to the government of Alberta. Meanwhile, the price of West Texas Intermediate (WTI) jumped 113.4 per cent year-over-year to US$62.33 a barrel last March.
Canadian Natural Resources “the best”
Mr. Pardy singles Canadian Natural out for particular praise, calling it “simply the best” as well as underlining its place on RBC’s “Global Top 30” and “Best Energy Ideas” lists.
Canadian Natural Resources is engaged in hydrocarbon exploration and production, primarily in Western Canada. While it is headquartered in Calgary, its exploration efforts extend to the UK sector of the North Sea, and offshore Côte d’Ivoire and Gabon.
The analyst says that, based on his SPI price assumption of US$64 per barrel in 2021, “Canadian Natural Resources is poised to generate nearly $8 billion of free cash flow (annually, even after paying out expected dividends of $2.2 billion). By aiming this free cash flow at debt reduction, CNQ is addressing market concerns that it runs with balance sheet leverage a snick too high.”
In the first quarter of 2021, the company produced a record 1.25 million barrels of oil equivalent (BOE) per day and paid down $1 billion in debt. Over that period, it also managed to distribute $503 million in dividends and bought back $23 million in common shares.
Canadian Natural plans to spend around $3.2 billion on capital this year, en route to targeted annual production of 1.23 million BOE daily.
Mr. Pardy notes that Canadian’s oilsands mining segment produced a record 468,800 barrels per day in 2021’s first three months, 12 per cent higher quarter-over-quarter.
Looking ahead, he says: “The company has now completed its planned turnaround at Horizon.” Synthetic crude oil production was slated to resume there May 8.
The company’s thermal portfolio also supported “relatively stable” production of 267,500 barrels a day in the first quarter.
“Liquidity-wise, CNQ remains in great shape, with approximately $5.5 billion available as at March 31 including credit facilities and cash balances,” the analyst sums up.
Enerplus free cash flow yields 29 per cent
Enerplus is one of Canada’s largest independent oil and gas producers. It holds oil and natural gas property interests in the United States in addition to British Columbia, Alberta and Saskatchewan.
At 91,671 BOE per day, its total first-quarter production was six per cent higher year-over-year. However, the mid-point range of its 2021 production guidance is 113,000 BOE daily, supported by between $360 million and $400 million of capital investment, about 20 per cent of which will go toward its North Dakota operations.
“With its (North Dakota) Bruin and Hess acquisitions in the Bakken now closed, Enerplus is poised to deliver substantial free cash flow over the course of 2021 while preserving its strong balance sheet. We are confident in Enerplus’ ability to integrate these acquisitions and boost efficiency,” says Mr. Pardy.
“We peg Enerplus’ free cash flow (excluding $38 million in dividends) at $523 million in 2021. This would equate to a free cash flow yield of 29 per cent.” By comparison, the analyst says, its fellow intermediate explorers-and-producers average 13 per cent.
“Enerplus remains our favourite intermediate producer.”
This is an edited version of an article that was originally published for subscribers in the June 4, 2021, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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Investor's Digest of Canada •8/2/21 •