Canadian Natural Resources: Best-in-Class Oil Stock

Canadian Natural Resources (CNQ) produces and sells crude oil, natural gas, and natural gas liquids. Oil & gas stocks are having a banner year. After a nerve-racking year in 2020, oil prices have come roaring back and producers are once again generating considerable cash flows.

Has the easy money been made? Perhaps, but that doesn’t mean there isn’t further upside ahead. For starters, it has become clear that inflation is not as transitory as once anticipated. There is a real chance that inflation will come in above the Fed’s preferred rates for some time and the threat of hyperinflation has not yet subsided.

In a high inflationary environment, there is a strong correlation to higher oil prices. So long as inflation is here to stay, so too are higher oil prices.

One of the better ways to benefit from higher oil prices is to invest in producers. In such an environment, producers will outperform. The opposite is also true, producers will underperform when oil prices drop.

It is for this reason that investors should consider avoiding some of the more speculative producers and instead look to best-in-class producers such as Canadian Natural Resources. In this environment, I’m bullish on CNQ. (See Analysts’ Top Stocks on TipRanks)

High-Quality Assets

One of the most attractive aspects of Canadian Natural is its status as one of the lowest costs producers in the industry. As a result, the company is generating considerable cash flows with oil prices above $60 per barrel.

The company is forecasting free cash flow in the range of $7.2-7.7 billion for Fiscal Year 2021. In such bullish times, there is a risk that management teams over-invest and perhaps overpay for acquisitions. The good news is that Canadian Natural’s team has been steadfast in its debt-reduction strategy.

Year-to-date, this leading oil sands producer has repaid $3.1B in non-revolving term loans and expects to reduce its debt-to-EBITDA ratio from 3.6x to 0.8x by the end of Q4 in Fiscal Year 2021.

The company is going to achieve its targets by redirecting 50% of adjusted funds flows – which strips out CapEx and dividends – to debt reduction. The other half is being redirected to share repurchases.

It is also well-diversified with a BOE (barrels of oil equivalent) production mix split between Oil Sands operations (36%), Heavy Crude (33%), Natural Gas (23%), and Natural Gas Liquids (11%). Diversification is underpinned by a large, long-life asset base. Approximately 61% of its forecast BOE in 2021 has a low decline rate (30+years) and overall, the company has a 10% corporate decline rate, which is one of the lowest in the industry.

Strong Dividend History

On top of its status as a low-cost producer, Canadian Natural is arguably one of the most reliable dividend growth stocks in the industry. This dividend challenger has achieved 21 consecutive years of dividend growth at a compound annual growth rate of 20%.

In March of 2021, Canadian Natural raised its dividend by 11% and it didn’t miss a beat, despite the pandemic which caused several of its peers to either maintain or decrease their dividend. In fact, only two other oil majors increased dividends and none reached the double-digit growth provided by Canadian Natural.

To find this type of dividend stability in the commodity industry is rare. It has proven capable of navigating difficult bear markets while continuing to return increased cash to shareholders. All the more reason for investors to stick with blue-chip oil & gas companies like Canadian Natural Resources.

The company is well-positioned to reward investors in an inflationary environment. If the price of oil collapses, investors can remain confident that CNQ will navigate such an event better than most.

Wall Street’s Take

Turning to Wall Street, Canadian Natural Resources earns a Strong Buy consensus rating, based on 12 Buys and three Holds assigned in the past three months. The average Canadian Natural Resources price target of $45.63 implies 6.4% upside potential.

Disclosure: At the time of publication, Mat Litalien did not have a position in any of the securities mentioned in this article.

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