Canadian Natural Resources Ltd. (CNQ, Financial) (TSX:CNQ, Financial) is one of Canada's largest and strongest companies, boasting an asset base of long-lived, slow-decline oil and gas wells.
Most of its producing assets are located in Canada, but the company also owns some offshore wells off the coast of Africa and in the North Sea. Canada is a major net exporter of oil, but the company is the only Canadian player with over 5 billion barrels of oil equivalent of proven reserves. In fact, Canadian Natural is sitting on 13.6 billion barrels in reserves and there are just four other companies in the world that have a greater amount of proven reserves.
Canadian Natural also has the largest natural gas reserves in Canada, with the capacity to roughly double output by the end of the decade. Furthermore, the company’s asset base includes long-lived and productive fields that require less maintenance capital and have a decline rate that is the lowest in its peer group.
Crude oil from Canada
As of 2020, there were 168 billion barrels of proven crude oil reserves in Canada. Of that, Worldometer says 97% is locked up in heavy oil sands, placing Canada third in the world with 10% of total share globally. Only Saudi Arabia and Venezuela have more and the United Staes is not even in the top five. That said, heavy oil recovery is not easy with only 5% to 15% of reserves being easily extracted and the rest waiting for more improved recovery techniques.
In recent years, the growth of crude oil production has outpaced the expansion of pipeline capacity. From 2013 to 2016, approximately 1 million barrels per day of nameplate pipeline capacity was added in Canada. However, no additional capacity has been introduced since and several projects have been terminated. The Keystone XL project was canceled in 2021, the Energy East project was abandoned by its developer in 2017 and the Northern Gateway project was rejected by the government in 2016. Despite these setbacks, the federal government approved the Trans Mountain Expansion project in 2019. This project involves duplicating the existing 715-mile Trans Mountain Pipeline that runs between Edmonton, Alberta and Burnaby, British Columbia, significantly increasing its capacity. Construction is currently underway, with the pipeline expected to become operational in late 2023. The new pipeline is approximately 608 miles in length and will cost $23.2 billion.
The point is that it is hard to get into this industry and virtually impossible to take on the leader in the space.
Financial standing
Canadian Natural Resources is financially rock solid with incredible efficiency. In 2022, it generated 11 billion Canadian dollars ($8.16 billion) in net income on CA$49.50 billion in revenue with 55% gross margins. Return on equity and return on assets have historically hovered around 13% and 6%, respectively, but in the last year the company has seen improvements to ROE of 29% and ROA of 14% while producing more than $800,000 in net income per employee over the last 12 months.
The company has a massive competitive advantage in that it can consistently generate cash flow from its existing assets without the need for new drilling or growth capital expenditures. As a result, Canadian Natural achieved an impressive return on capital of around 25% in 2022, compared to its three-year average of 9%. This creates a substantial stream of cash that allows for dividend increases, debt reduction and share buybacks. Last year, the company generated free cash flow after dividends of around $11 billion, and it paid out roughly $5 billion in dividends.
Management's current plan involves using this net cash flow (after dividends) to decrease debt to under $10 billion and then spend 100% of future free cash flow to accelerating shareholder returns by increasing dividends and repurchasing shares. On the first front, Canadian Natural has continuously increased dividends over the last 20 years at a compounded growth rate or more than 20%. As for buybacks, the company started 2023 with a bang, repurchasing over three million shares in January with plans to pay a dividend of $2.70 per share - a 4.6% yield at the current price.
The bottom line
If all Canadian Natural Resources' BOEs were converted to dollars at current prices, it would be worth roughly $1 trillion. At the current net profit margin, it would equate to around $260 billion. The current market capitalization is $66 billion. The company is very efficient with a break even close to $40 a share. If the price stays around $80, that oil reserve gets a lot more valuable on a cash flow basis. This could be why Canada has not been as strict with regulations as the U.S. has been.
Unless the price of natural energy resources goes to zero, the value of all Canadian Natural Resources' assets will remain much higher than its current market value. Investors are likely to be rewarded by the company’s debt reduction and share buyback activity with higher income and capital gains.
