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Canadian Natural Resources is a diversified and independent energy producer in the world. It is the largest independent natural gas and heavy crude oil producer in Canada.
It operates a balanced mix of natural gas, light crude oil, heavy crude oil, and oil sands. The company holds some of the best oil sand assets in North America, particularly thermal in situ properties, having tremendous growth potential.
The company’s business can be broadly classified into Exploration and Production (North America, North Sea, offshore Africa), Oil Sands Mining and Upgrading, and Midstream and Refining segments. The Exploration and Production segment is Canadian Natural’s core business, while the other two businesses provide a nice diversification.
Canadian Natural has a balanced mix of natural gas, light crude oil, heavy crude oil, bitumen, and SCO. The company also owns midstream assets consisting of two crude oil pipeline systems and cogeneration plants, which enables the transportation of heavy crude oil in international markets.
Candian Natural derives nearly 89% of its total revenue from the sale of crude oil and NGLs and the remaining 11% from natural gas.
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Investment Data
Revenue Growth & Market Exposure
With more than four decades of experience, Canadian Natural has developed an expertise in the operation of mature and low-risk basins, and ownership of extensive infrastructure.
The company’s Oil Sands Mining and Upgrading segment represents 36% of its production, followed by thermal in situ assets (15%), North American E&P assets, crude oil and NGL production (22%), international production (4%), and balance 23% is conventional and unconventional assets. Canadian Oil Sands Mining and Upgrading projects are advantaged with long life, no decline, and no reserve replacement cost or risk.
Candian Natural Resources has compounded its revenue growth at ~24% CAGR over the last three years. The company should gain from the tremendous development opportunities within its in situ oil sand asset portfolio. Canadian Natural’s asset base has low sustaining capital and low reservoir risk which allows it to effectively manage through commodity price cycles, with little impact on near-term production levels.
The company reported a net loss for FY2020 due to lower crude oil and NGLs netbacks in the Exploration and Production segments and lower realized SCO prices in the Oil Sands Mining and Upgrading segment. Total Q4 production of crude oil and NGLs increased by 4% YoY and sales price averaged $40.56 per bbl, a decline of 18% YoY.
Total annual production increased by 6% driven by the first full year of operation at Jackfish, increased Kirby North production, and high utilization rates and operational enhancements from Canadian Natural’s Oil Sands Mining and Upgrading segment.
Dividends
Canadian Natural is a Canadian dividend aristocrat and has paid dividends regularly since 2001. FY2020 dividends increased 13% YoY, to $1.70 per share. The company last raised dividends by 11% marking the 21st consecutive year of growing them.
Canadian Natural has a history of growing dividends at 20% CAGR since its inception and 10-year average dividend growth of 21% CAGR. It sports an average annual yield of more than 4% but a high payout ratio currently. Canadian Natural Resources maintained its dividend despite depressed oil prices.
Canadian Natural’s assets are characterized by long life low decline base and low maintenance, which significantly reduces the capital outflow and continues to generate significant free cash flow. During the year, funds flow was strong at over $5.3 billion and free cash flow was ~$690 million after the capital program and dividends. A strong balance sheet further supports investment-grade credit ratings.
The company announced its 2021 capital budget targeted at ~$3.2 billion and has a production target of 1,190,000 BOE/d – 1,260,000 BOE/d for 2021. The capital budget drives targeted annual production growth and robust free cash flow generation. 2021 free cash flow is targeted at $4.9 billion to $5.4 billion, after capital expenditures and dividend increases. Canadian Natural’s transition to a long-life low decline asset base will further support sustainable free cash flows.
Canadian Natural is in a very strong position going forward even in the downside scenarios. The company has large development opportunities within its in situ oil sand asset portfolio, incremental to operating Primrose, Wolf Lake, Kirby South, Kirby North, and Jackfish projects.
Competition
Canadian Natural competes with the likes of Suncor, Imperial Oil, Husky Energy Inc., and Cenovus Energy Inc. Suncor Energy is the largest oil producer in Canada and one of the largest independent energy companies in the world while Imperial Oil is an integrated energy company, dealing in exploration, production, refining and marketing oil & gas and other petroleum products and Husky Energy is a Canadian integrated oil and gas company. Canadian Natural is able to keep its cost base low due to economies of scale and minimal capital cost requirements.
Bottom Line
Global crude oil prices declined in the first half of 2020 due to the lower global demand, as a result of the COVID-19 pandemic and related economic conditions. With the economic recovery and production cuts, pricing improved beginning the fourth quarter of 2020.
Canadian Natural is one of the largest oil producers in Canada with strong fundamentals and low-cost production. The company is well-positioned to weather the recession with its integrated assets, capital flexibility, a large portfolio of varied projects, and a strong focus on efficient operations.
Canadian Natural has a strong upside given its significant free cash flow due to quality assets. However, there is a transition away from conventional oil and the strategy for CNQ is not clear.
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