Canadian Natural remains shrewd steward of capital

In their most recent evaluation of Canadian Natural Resources Ltd. (TSX─CNQ; NYSE─CNQ), Jeff Martin and Tyler Reardon, analysts with Peters & Co. in Calgary, don’t pull any punches.

They admit that at 3.7, the ratio of debt-to-cash flow they’ve forecast for the company for the end of 2015 is high — but likely no higher than that of its peers. Indeed, many of Canadian Natural’s rivals are in the same boat.

Meanwhile, with an eye to plunging petroleum prices, Canadian Natural is cutting its 2015 capital budget by 28 per cent to $6.2 billion from $8.6 billion.

The move doesn’t surprise Messrs. Martin and Reardon, who’ve been cutting their estimates of the company’s capital spending over the past few weeks.

And although at $5.2 billion, their current estimate is $1 billion below the company’s number, the analysts are sticking to their guns, given the likelihood of more cuts. In fact, Mr. Martin and Mr. Reardon continue to view Canadian Natural as one of the best allocators of capital in the oil patch.

In the interim, they see production at the company’s Horizon project in the Alberta tarsands rising by 5,000 barrels a day in 2015.

For the fourth quarter, Horizon averaged daily output of 128,000 barrels, boosting that by 8,000 barrels in December alone — 9,000 barrels above the project’s stated capacity.

With Canadian Natural having spent $7 billion on phases two and three at Horizon, it’s set to spend another $6 billion there over the next three years.

But to protect this level of capital allocation, the company will cut capital spending elsewhere, say Messrs. Martin and Reardon, who are continuing to peg Canadian Natural at “sector outperform”. Their 12-month price target is $40 a share.

Our other market mavens were onside with Messrs. Martin and Reardon this month regarding Canadian Natural Resources. Of the 13 other analysts we polled, 10 rated it a “buy” and only three, a “hold,” lofting the company into second place in our list of top-10 buys.

Headquartered in Calgary, Canadian Natural Resources is one of the world’s biggest independent producers of crude oil and natural gas. Not only is it the second-biggest producer of gas in Canada, it’s also its biggest producer of heavy oil. Indeed, its Horizon project boasts reserves of six billion barrels.

Canadian Natural is also a primary player in northeastern British Columbia where it’s now the second-biggest holder of undeveloped land. In addition, the company boasts big exploration blocks in northwestern Alberta, as well as in the province’s Foothills. Canadian Natural also has operations in the North Sea and off the coast of Africa.

For the three months ended Sept. 30, the company’s net earnings fell to $1 billion or $0.94 a share, from $1.2 billion, or $1.07 a share, for the similar period in 2013.

But revenue was slightly higher, inching up 1.9 per cent to $5.4 billion, while cash flow from operations slipped less than half a per cent to $2.4 billion, or $2.21 a share.

For the nine months ended Sept. 30, Canadian Natural’s net earnings rose to $2.7 billion or $2.49 a share, from $1.9 billion, or $1.70 a share, for the similar period in 2013.

Sales, not surprisingly, were also higher, climbing to $16.5 billion from $13.6 billion, while cash flow from operations rose to $7.2 billion or $6.57 a share, from $5.7 billion, or $5.22 a share, for the similar period in 2013.


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

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