The Canadian oil and gas sector offers investors a wide range of possibilities. Deciding which stocks to buy can be tricky because the commodity markets tend to be volatile, and the share prices of oil and gas producers can jump or drop very quickly.
New investors should look for companies that have diversified assets, a competitive advantage in their core operations, and a rock-solid history of efficient use of capital.
1. Balanced asset portfolio
Canadian Natural Resources probably owns the best overall asset mix in the Canadian large-cap energy sector. The company produces natural gas, heavy crude oil, light crude oil, and natural gas liquids.
The variety in the assets gives Canadian Natural diversification in earnings when commodity prices fluctuate.
Canadian Natural’s extensive liquids-rich natural gas properties in Northwestern Alberta and Northeastern British Columbia are of specific interest for investors. As one of the largest natural gas producers in western Canada, the company has developed a strong competitive advantage in this region due to its early investment in infrastructure and prime land holdings.
Canadian Natural is also Canada’s largest producer of heavy oil, with its core asset being the Pelican Lake project. Again, the company has an advantage because it owns vast land positions and has the ability to undertake large-scale drilling and development programs while minimizing capital costs.
The Horizon Oil Sands mining and upgrading project includes a surface mining and bitumen extraction operation as well as a state-of-the-art upgrading facility. The Horizon project has enough resources to produce high-quality synthetic crude oil for decades.
The advantage for investors with the Horizon project is its longevity. Conventional oil deposits tend to have a short production life.
Canadian Natural’s other oil sands assets include thermal in situ properties that are developed using both steam assisted gravity drainage (SAGD) and cyclic steam stimulation (CSS) techniques. Investors looking to benefit from advances in oil extraction technology will see the long-term production potential in these properties.
2. Effective and efficient allocation of capital
Canadian Natural Resources is an extremely well-run company. Management does an excellent job of allocating resources to the most profitable opportunities across the asset base.
The company owns 100% of most of its operations and this gives Canadian Natural the flexibility to shift capital relatively quickly.
The company’s Q2 2014 results prove that management is doing a good job. Record production at both Horizon and Pelican Lake helped total crude oil and natural gas liquids production hit an all-time high of 542,200 barrels per day in the second quarter, a 12% increase over the first three months of the year.
3. Record earnings
In the Q2 2014 statement, Canadian Natural reported record cash flow of $2.63 billion compared to $1.67 billion in the same period in 2013.
Adjusted net earnings for the second quarter were a record $1.15 billion compared to $462 million a year ago.
4. Shareholder returns
Canadian Natural Resources rewards its shareholders with a growing dividend and share buybacks. In the first half of 2014 alone, Canadian Natural bought and cancelled more than 8 million of its common shares.
In the past two years, the company has more than doubled the dividend. The distribution of $0.90 yields about 2%.
The bottom line
New investors looking for a large-cap Canadian energy company with a balanced asset portfolio and an excellent track record should consider Canadian Natural Resources. I think the recent pullback in the oil sector is a good opportunity to enter the stock.
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