Oil and gas stock CNRL holds the line on costs

With oil prices still low, it’s more crucial than ever for an energy play to keep its costs down if it wants to make money. Canadian Natural Resources Limited., a global oil and gas exploration, development and production company headquartered in Calgary is doing just that.

Keeping costs down seems to be the thinking at Canadian Natural Resources Limited (TSX─CNQ), if its first quarter is any indication.

Because of lower costs at nearly every one of its assets, Canadian Natural was able to post a higher-than-expected cash flow, report Jeff Martin and Tyler Reardon, analysts with Peters & Co. in Calgary.

The two analysts admit that because some of Canadian Natural’s cost-cutting piggybacked on lower oil prices, some cost reductions won’t be sustainable. The analysts also concede that this Canadian oil and gas company stock got a lift from cheaper power prices in Alberta, the location of many of Canadian Natural’s operations.

But Messrs. Martin and Reardon suggest that the company has been working with both suppliers and service outfits to keep the cost of doing business down. Indeed, they say that 25-30 per cent of the cost reductions that Canadian Natural has logged so far have been related to lower prices for various services.

More belt-tightening to come

The analysts also suggest the company could tighten its belt even more, given that the Alberta tarsands’ comparatively high costs make them uncompetitive against other oil and gas stocks’ sources. With its Horizon project, Canadian Natural is a big player in the tarsands.

For the first quarter, the company logged daily production of 898,000 barrels of oil equivalent — 11 BOE/D below the analysts’ own estimate, but in-line with the consensus call.

Yet at $1.25 a share, Canadian Natural’s cash flow topped the Street’s forecast by $0.06, while leaving Messrs. Martin and Reardon $0.11 down the road.

Besides its belt-tightening, the better-than-expected performance reflects a tax recovery of $105 million, along with a realized hedging gain of $256 million.

Nonetheless, the company still swung to a net loss of $252 million, or $0.23 a share, from net earnings of $622 million, or $0.57 a share, for the similar period in 2014.

Not surprisingly, revenue was also down, dropping to $3 billion from $4.3 billion, while total expenses climbed to $3.7 billion from $3.5 billion.

Capital, exploration and production budgets cut

In the meantime, Canadian Natural is cutting its 2015 capital budget to $5.7 billion from $6 billion — in-line with the analysts’ forecast.

The company is also slicing $120 million from its oil and gas exploration and production budget for North America, while chopping $100 million from its crude oil operations outside Canada, as well as $35 million from its Horizon project.

Horizon itself fared well in the expense column, posting operating costs of $29.73 a barrel. Not only was this $4.40 less than what the analysts had estimated, but it was Horizon’s lowest quarterly cost ever. For Horizon, the company now sees operating costs ranging from $31 to $34 a barrel, instead of between $32-$35.

Messrs. Martin and Reardon are following suit, lowering their estimate of Horizon’s operating costs to $32.70 from $34.50 a barrel.

But for its North Sea operations, Canadian Natural now sees costs ranging between $52 and $58 a barrel, instead of between $48 and $52. The analysts, by contrast, think costs will finish up near $60.

Elsewhere, the company expects its cash tax to range between $10 million and $166 million and not between $105 million and $241 million, as previously thought.

Canadian Natural is also raising its estimate of midstream cash flow to $100 million from $95 million.

CNRL among best oil and gas stocks to buy now

For Messrs. Martin and Reardon, Canadian Natural continues to merit a “sector outperform” rating with a 12-month price target of $45 a share.

Moreover, in terms of growth, relative valuation and capital allocation, the company still ranks well among the other big-cap oil and gas stocks the analysts now cover.

The analysts admit Canadian Natural’s debt leverage ratio continues to exceed that of several of its peers. But they still think that the company will be able to take advantage of possible mergers and acquisitions should they come up.

They also believe Canadian Natural will be able to boost its rate of organic growth when oil and gas prices bounce back.

Our market survey participants were onside with Messrs. Martin and Reardon this month in their admiration for Canadian Natural. Of the 12 other analysts we polled, nine rated the company a “buy” and only three a “hold,” lofting this giant oil and gas stock into second spot in our over-all list of top-10 buys.


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

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