Canadian Natural Resources (NYSE:CNQ) explores for, develops, produces, markets, and sells crude oil, natural gas liquids (NGLs), and natural gas in North America. This article discusses the reasons for considering the stock as an excellent long-term value creator.
Big Reserves Base
Canadian Natural Resources has a reserve base of 7.99 billion barrels of oil equivalent as of 2013. This makes the company one of the largest in terms of reserve base in North America and 35 years of 2P reserve index life ensures that strong production growth will continue.
Canadian Natural Resources has also been actively looking for more reserves and a reserve replacement ratio of 143% for 2013 points to the fact that the company’s strong capital expenditure is translating into reserves growth along with production growth.
Robust Production And Cash Flow
For 2013, Canadian Natural Resources had an average production of 671mboe per day. The company expects 2014 production to be in the range of 792mboe per day to 836mboe per day. Therefore, production growth is likely to be in the range of 18% to 24% as compared to 2013 and this is very robust.
With an increase in production, the company expects cash flow growth to increase significantly. This is important as it will translate into higher returns for shareholders. For 2013, the company had an operating cash flow of $7 billion.
In 2014, the company expects operating cash flows to be in the range of $9.6 to $10 billion. The company is therefore on a strong growth path and this makes it an attractive investment to consider.
High Capital Expenditure
I also like companies with a high capital expenditure when the investments are targeted towards assets with high potential returns. Canadian Natural Resources has been making good investments and the results are evident from the company’s production and cash flow growth.
In 2013, the company had a capital expenditure of $6.8 billion. The company’s capital expenditure plans for 2014 are even more robust with a planned capital expenditure in the range of $11 billion to $11.4 billion.
The capital expenditure is not high for a company expected to generate nearly $10 billion in cash flows. Further, the capital expenditure will translate into cash flow growth over the next few years and this is a more important point to consider for long-term investors.
Strong Balance Sheet
For a company investing heavily for growth, it is important to analyze the balance sheet as there is always a risk of over leveraging to fund growth. This is certainly not a risk factor for Canadian Natural resources with a 2013 debt to EBITDA of 1.1. Further, the company expects debt to EBITDA to remain at same levels in 2014 even after a planned $11 billion capital expenditure. Canadian Natural Resources is therefore very strong fundamentally.
As of 2013, the company did not have a strong cash balance. I believe that this is not a matter of concern for a company that is expected to generate operating cash flows in the range of $10 billion for 2014.
Canadian Natural Resources is rated at BBB+ with a stable outlook by S&P and rated Baa1 with a stable outlook by Moody’s. Therefore, the company’s credit outlook is stable and the balance sheet is likely to remain strong.
High Shareholder Returns
Canadian Natural Resources has rewarded shareholders through capital appreciation as well as dividends. In the last one year, the company’s stock has surged higher by 42% with the company performing well in terms of production growth. A strong outlook for 2014 has also helped in the stock upside. I believe that the stock upside is likely to continue with strong earnings likely in 2014. Further, a high capital expenditure program in 2014 will ensure that production and revenue growth continues in 2015. Canadian Natural Resources is well positioned for further stock upside.
Besides stock price appreciation, the company has also rewarded shareholders through dividends. Since 2009, the company’s dividend payout has increased at a CAGR of 31% and the growth is likely to continue with strong expected cash flows. Canadian Natural Resources currently offers an annualized dividend of $0.83 and a dividend yield of 1.8%.
Canadian Natural Resources has also been active when it comes to shareholder value creation through share repurchase. In 2013, the company purchased 10.2 million shares and in 2014, the company has already bought back 2.9 million shares. Even if the company uses debt for share buyback, I believe it is a good shareholder value creation strategy.
Canadian Natural will continue to be one of the largest natural gas producers and land holders in Western Canada. The company is is currently trading at $45.2 levels and I believe that investors can consider entry in this stock even at current levels.
Analyst estimates suggest that the company’s earnings growth is likely to be 94% in 2014 and investors can benefit from the bullish sentiment related to strong earnings. Higher dividend payout in 2015, continued share repurchase and aggressive growth will continue to make the company an attractive portfolio stock.