Canadian Natural Resources Ltd.
/ (CNQ-NYSE)/ Equity Research / CNQ | Page 6
Current Recommendation / NEUTRAL
Prior Recommendation / Underperform
Date of Last Change / 06/28/2013
Current Price (06/27/13) / $28.53
Target Price / $30.00
SUMMARY
We are recalibrating our investment thesis on Canadian Natural Resources to Neutral from Underperform, reflecting a balanced risk/reward profile. The company’s large, diversified oil and gas asset bases, together with international exposure and a well-balanced blend of conventional and unconventional prospects, provides a buffer against uncertainties in the sector. Other positives for CNQ include its active hedging policy, competitive cost structure, strong balance sheet and robust free cash flow. However, the company’s exposure to the inherently cyclical and volatile E&P sector offsets these strengths and remains a key area of concern, in our view. The stock has also been held back by operational challenges, continued volatility in natural gas prices and a fresh round of cost inflation in the oil sands regions./ Equity Research / CNQ | Page 6
SUMMARY DATA
52-Week High / $34.6552-Week Low / $25.28
One-Year Return (%) / 11.80
Beta / 1.56
Average Daily Volume (sh) / 2,515,939
Shares Outstanding (mil) / 1,090
Market Capitalization ($mil) / $31,108
Short Interest Ratio (days) / 3.95
Institutional Ownership (%) / 60
Insider Ownership (%) / 5
Annual Cash Dividend / $0.48
Dividend Yield (%) / 1.69
5-Yr. Historical Growth Rates
Sales (%) / 7.3
Earnings Per Share (%) / -8.5
Dividend (%) / 26.2
P/E using TTM EPS / 18.3
P/E using 2013 Estimate / 13.6
P/E using 2014 Estimate / 10.4
Zacks Rank *: Short Term
1 – 3 months outlook / 3 - Hold
* Definition / Disclosure on last page
Risk Level * / Average,
Type of Stock / Large-Value
Industry / Oil-C$ Exp Prod
Zacks Industry Rank * / 60 out of 267
OVERVIEW
Calgary, Alberta-based Canadian Natural Resources Ltd. (CNQ) is engaged in the acquisition, development and exploitation of crude oil and natural gas properties. It is one of the largest independent exploration and production (E&P) companies in Canada, with extensive heavy crude oil and natural gas developments.
Canadian Natural Resources’ core operations are focused in western Canada, the United Kingdom sector of the North Sea and offshore West Africa. As of the end of 2012, the company had approximately 5,018 million oil-equivalent barrels (MMBOE) in total proved reserves, of which approximately 86% was crude oil/liquids and 14% natural gas. In addition, Canadian Natural had approximately 2,255 million barrels in total proved reserves in its oil sands (naturally occurring mixtures of bitumen water and sand) operations in the Province of Alberta. Production averaged 654,665 oil-equivalent barrels per day (BOE/d) during 2012, comprising 69% crude oil/ liquid hydrocarbons and 31% gas.
Till date, the company’s most prominent initiative is its “Horizon” Oil Sands Project in the Athabasca oil sands play of northern Alberta. Canadian Natural achieved first synthetic crude oil production from the $8.3 billion project in February 2009. Designed to produce 110,000 barrels of synthetic crude per day, the company completed Phase I construction of the project in 2009. The Canadian oil sands, with their estimated 200 billion barrels of recoverable reserves, are the only oil resource to rival that of Saudi Arabia. The company’s estimates indicate 6-8 billion net recoverable barrels for its Horizon acreage.
REASONS TO BUY
Ø Canadian Natural Resources has a broad portfolio of low-risk exploration and development projects that yield long-term volume growth at above-average rates. We appreciate the company’s diverse asset base both geographically and in terms of product, comprising approximately 30% natural gas and 70% crude oil with the bulk of production located in G8 countries. We believe, this significantly reduces the company’s risk profile and gives its results a high level of stability.
Ø In addition to the conventional oil and gas production assets, Canadian Natural is also a major oil sands player with several projects in inventory. The company achieved a significant milestone in February 2009 when it started the Horizon oil sands program. Average production of Synthetic Crude Oil (SCO) from the project was approximately 109,000 barrels per day (Bbl/d) for the quarter ended Mar 31, 2013. The company expects annual production eventually ramping up to 500,000 Bbl/d by the next decade, thereby significantly augmenting Canadian Natural’s long-term production growth profile.
Ø Canadian Natural’s strong, balanced and diverse asset portfolio, combined with its focus on low cost operations, allowed it to generate substantial free cash flow even in a low price environment. Additionally, with most of the company’s production generated from North America, Canadian Natural escapes the political risk associated with operations in unstable countries.
Ø Canadian Natural displays a healthy financial position, reflected by a low debt-to-capitalization ratio of 27.7%, making the company less susceptible to financial risk. Backed by this strength, management has hiked dividend for 13 consecutive years with a compounded annual growth rate of 21%.
REASONS TO SELL
Ø Canadian Natural pursues long-term oil projects, which call for large capital outlays and several years of development before any cash flow is realized. Therefore, cost and time overrun in the company’s ongoing projects have a negative impact on the stock’s performance.
Ø A steep drop in crude prices may render the oil sands mining initiatives as economically unviable considering the high up-front costs required for their development. In this case, companies like Canadian Natural may have to call off or postpone projects under construction.
Ø Canadian Natural conducts operations in many countries, with a major portion of its total revenue coming from international markets. As such, the company is exposed to risks associated with doing business abroad. Such risks include embargoes and/or expropriation of assets, exchange rate risks, terrorism and political/civil sentiment, etc.
Ø Environmental organizations argue that oil sand crude are greenhouse-gas intensive, thereby contributing to global warming. As such, there have been widespread regulations over Canada’s oil sands development in an attempt to stem global climate change and meet the country’s emissions-reduction goals. These policies could impact future profitability in the oil sand business.
RECENT NEWS
Canadian Natural Prices Notes
On May 23, 2013, Canadian Natural Resources announced the pricing of C$500 million 2.89% unsecured notes due Aug 14, 2020. The notes were priced at C$100.003 a piece.
The company plans to utilize the proceeds for the repayment of bank debts and for general corporate purposes.
As of Mar 31, 2013, Canadian Natural had C$18.0 million cash in hand and long-term debt of approximately C$9,322.0 million, representing a debt-to-capitalization ratio of 27.7%. The company paid net interest of $77.0 during the first quarter. We expect this interest expense to increase with the sale of the new notes.
First Quarter 2013 Results
On May 2, 2013, Canadian Natural Resources reported mixed first-quarter 2013 results.
Earnings per share, excluding one-time and non-cash items, were C$0.37 ($0.37) in the quarter, way behind the Zacks Consensus Estimate of $0.43. The miss is primarily due to significant fall in price realization for crude oil.
The Calgary, Alberta-based operator’s per share profits were however up from the first quarter of 2012 level of C$0.27 ($0.27), favored by higher price realizations for natural gas.
Quarterly revenues of C$3,755.0 million (US$3,726.1 million) were up 6.5% from the year-ago period, owing to higher crude oil and liquid production. The top line also surpassed our projection of US$3,427.0 million.
Canadian Natural’s first-quarter cash flow – a key metric to gauge its capability to fund new projects and drilling – amounted to C$1,571.0 million, which was 22.7% higher than that achieved in the first quarter of 2012.
Production
The total production of Canadian Natural during the quarter was up 11.2% year over year to a record 680,844 oil-equivalent barrels per day (BOE/d). Oil and natural gas liquids (NGLs) production increased approximately 23.7% to 489,157 barrels per day (Bbl/d), primarily due to successful drilling of crude oil.
Natural gas production, however, declined 11.7% from the prior-year period to 1,150 million cubic feet per day (MMcf/d) due to the decision of Canadian Natural to reduce drilling operations of natural gas and allocate capital for oil projects that will provide higher return.
Realized Prices
On a reported basis, the average realized crude oil price (before hedging) during the first quarter was C$60.87 per barrel, representing a drop of 26.1% from the corresponding quarter last year. The average realized natural gas price (excluding hedging) during the three months ended Mar 31, 2013 was C$3.51 per thousand cubic feet (Mcf), up from the year-ago level of C$2.73 per Mcf.
Capital Expenditure & Balance Sheet
Canadian Natural's total capital spending during the quarter was C$1,736.0 million, as against C$1,596.0 million in the year-ago quarter.
As of Mar 31, 2013, Canada’s second-largest oil producer had C$18.0 million cash in hand and long-term debt of approximately C$9,322.0 million, representing a debt-to-capitalization ratio of 27.7%.
Guidance
Management is guiding towards production of 435,000–461,000 Bbl/d of liquids and 1,090–1,110 MMcf/d of natural gas during the second quarter of 2013. Canadian Natural is planning to drill 27 net thermal in-situ wells and 127 net crude oil wells in North America during the Apr-Jun period of 2013.
For 2013, Canadian Natural estimates production of 482,000–513,000 Bbl/d of liquids and 1,085–1,145 MMcf/d of natural gas.
Dividend
Canadian Natural announced quarterly cash dividend payment of C$0.125 per share, which has increased by 19.0% from the year-ago level. The increased dividend will be paid on Jul 1, 2013, to shareholders of record as on Jun 14, 2013.
VALUATION
We like Canadian Natural Resources for its diverse asset base, strong financial backup and efficient management team. The company is also a major oil sands player with a number of projects in inventory and a major development currently ramping production.
However, we think that these factors are adequately reflected in the present valuation, leaving little room for meaningful upside from current levels. Another area of concern is delays and/or cost over-runs in its Horizon oil sands.
This is reflected in our new Neutral recommendation on the company’s shares. Our $30 price objective represents a multiple of 5.3X trailing twelve-month cash flow.
Key Indicators
Earnings Surprise and Estimate Revision History
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DISCLOSURES & DEFINITIONS
The analysts contributing to this report do not hold any shares of CNQ. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts’ personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1022 companies covered: Outperform - 14.9%, Neutral - 78.5%, Underperform – 6.0%. Data is as of midnight on the business day immediately prior to this publication.
Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company’s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock’s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively.
Analyst / Nilanjan ChoudhuryQCA
Lead Analyst / Nilanjan Choudhury
Nilanjan Choudhury
Reasons for Update / 1Q’13 Earnings Update & Recommendation Change
/ Equity Research / CNQ | Page 6