As weakness sustains in oil prices, there are continued opportunities in the industry in terms of long-term investment. Canadian Natural Resources (CNQ, Financial) is one stock that has excellent long-term growth potential and the stock looks attractive at current levels for a 3-5 year investment horizon.Ă‚
Canadian Natural Resources explores and develops crude oil, natural gas liquids (NGLs), and natural gas in North America. The company offers light and medium crude oil, primary heavy crude oil, Pelican Lake heavy crude oil, bitumen (thermal oil) and synthetic crude oil (SCO). In terms of presence, the company has operations in Western Canada; the United Kingdom portion of the North Sea; and CĂ´te dIvoire, Gabon, and South Africa in Offshore Africa.
As of December 2014, the company had 4,511 mmbbl of proved crude oil and natural gas reserves. Further, for the same period, the company had 8,891mmboe of proved and probable reserves. For 2015, the company’s production mix is likely to be 35% heavy crude oil, 35% natural gas and 30% light crude oil. A strong proved reserve base and a well diversified production mix is the first reason to be positive on Canadian Natural Resources.
The second big reason to be positive on Canadian Natural Resources is the company’s outlook for 2015 in terms of production and cash flow. More importantly, the company’s outlook for cash flow as it is critical in terms of sustaining high levels of dividend and also maintaining high financial flexibility. For 2015, the company expect operating cash flow to be in the range of C$6.1 to C$6.5 billion. This implies that the company’s dividend yield of 2.5% looks sustainable for 2015.
Further, I must also add here that the company has targeted a capital expenditure of C$6.0 billion for 2015. In other words, the company is working within its financial means in difficult times. Considering the company’s investment plan and potential cash flow for 2015, I don’t expect the company’s debt to increase during the year.
The company’s conservative stance should also not be mistaken for high leverage or weak fundamentals. As of December 2014, Canadian Natural Resources had a debt to capitalization of 33% and a debt to EBITDA of 1.3. In addition, the company had a liquidity of $7.1 billion in bank lines. A strong liquidity position ensures that the company can go for aggressive growth once oil prices recover.
Currently, a conservative financial policy to keep financial flexibility high for good times is an excellent strategy. The company’s strong balance sheet position is also indicated by the fact that the S&P long-term rating for the company currently is BBB+ with a stable outlook and the short-term rating is A-2. Clearly, the company has strong fundamentals and the company is also shareholder friendly considering the point that the company has increased dividends for 15 consecutive years. While the company’s dividends might not increase in 2015, the current dividend level can still be considered excellent.
From a long-term perspective, the dividends growth outlook is robust, considering that the company estimates free cash flow of nearly C$2 billion in 2017 if WTI oil prices are at $70 per barrel. The free cash flow is likely to surge to over C$4 billion in 2018. Therefore, with excellent assets, the company’s long-term outlook is strong and the company has a strong balance sheet to easily see through the crisis.
In conclusion, there are several positives for Canadian Natural Resources in the long-term and the stock is likely to provide strong shareholder returns over the long-term. Investors can consider exposure to the stock at current levels as a TTM EV/EBITDA valuation of 5.2 certainly seems attractive.
