Oil prices have entered a faithful declining trend in April 2011. Until then, crude oil prices were closer to $130 per barrel of oil equivalent; today, the value has slipped below $110. As a consequence, operating margins in the oil and gas industry have been reduced. For some competitors, the new context meant renewed financial trouble. For others, however, it meant an opportunity to settle the business as competition eased somewhat. Most telling are the actions taken by Statoil (STO), a self-imposed slowdown to guarantee a sounder business model through debt reduction and improvement of reserve replacement ratio. Canadian Natural Resources (NYSE:CNQ) appears to be taking similar steps, and gurus with long-term positions have not modified their opinion. Last, according to the Peter Lynch’s earnings line, this is a good moment for entering a position in the company.
Old and New Assets
The bad news about this integrated candian oil company, specialized in exploration and production of oil and gas, is a recent environmental accident. According to news reports, a pipeline owned by Canadian Natural Resources spilled 70,000 litres of oil and processed water northwest of Slave Lake, Alta. The upside to the news, the incident is minor compared when compared to the Exxon Valdez or Deepwater Horizon incidents. Nonetheless, Greenpeace Canada says the firm has had almost twice as many pipeline incidents as other companies in Alberta.
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- CNQ 15-Year Financial Data
- The intrinsic value of CNQ
- Peter Lynch Chart of CNQ
Incidents aside, Canadian Natural Resources continues to advance over a strategy of acquisitions. The latest transaction relates to Devon Canada’s Canadian conventional assets, excluding Horn River and the heavy oil properties. In addition to strengthening the company’s portfolio of assets, it carried a positive impact over market performance. Most importatnly, the new assets are located in the vecinity of company operations, reducing costs related to full integration to ongoing activities.
With respect to the Montney acreage, located in British Columbia, Canadian Natural Resources announced that prospects have been duly assessed. According to findings, the asset is estimated to hold 6.7 trillion of cubic feet equivalents. Most importantly, the discovery generated great interest by industry peers but none relflected it on an attractive acquisition proposal. Hence, management has decided to retain one of the largest Montney land positions in Western Canada with over one million net acres.
Prospects and Valuation
Throuhgout the month of March, three financial institutions gave Canadian Natural Resources an “Outperform” rating. FirstEnergy Capital, Morgan Stanley and CIBC rating reiteration comes to confirm a positive trend started on the last quarter of 2013. Most importantly, the target price pushed by the institutions was located among the high thirties has been widely surpassed. Together, quarterly dividends have climbed to $0.22, representing a 1.56% annual yield.
The financial standing of Canandian Natural Resources is solid, although revenue and net income have reached a ceiling. Nonetheless, debt level continues to decline and cash flow remains strong amid a four point reduction in operating margins. And future performance has been guaranteed by a 147% reserve replacement ratio, most of which are located in North America, while international exposure remains low.
Ahead, a broad and low-risk portfolio guarantees Canadian Natural Resources uninterrumpted operations. Product and geographical diversity offers the company a balaned exposure, which is backed by a focus on low-cost operations that secures a strong cash flow.
Canadian Natural Resources currently trades at 21.3 times its trailing earnings, carrying a 24% discount to the industry average. The gurus with the largest positions in the company are Chris Davis (Trades, Portfolio), Jean-Marie Evelliard and NWQ Managers (Trades, Portfolio). All three have positions with long-term perspectives, although the second is the only one buying. The other two hold older positions and have started to collect rewards. However, the controlled sale and purchases are a strong indicative of a stock worth the long run.
Disclosure: Vanina Egea holds no position in any of the mentioned stocks.