On Canadian Natural Resources Ltd’s (TSX: CNQ)(NYSE: CNQ) recent third-quarter conference call with analysts and investors, President Steve Laut had one key message. His message was that Canadian Natural Resources generates a lot of sustainable cash flow and it is about to generate even more. This is why he spent a lot of time on the call reiterating the company’s plans for all that cash even as oil prices weaken.
Cash flow gusher
Laut reminded investors that the company’s Horizon project is in the last half of its expansion phase. He said that,
“As a result we are close to completing the significant and sustainable ramp up of Horizon free cash flow to $4.5 billion to $5 billion a year at $81 WTI. And even at a $70, WTI delivers an impressive $3.5 billion to $4 billion every year with decades to come. Horizon has the biggest impact on our corporate free cash flow as production ramps up and capital spending drops off. Canadian Natural’s free cash flow is strong and growing rapidly.”
As Laut points out, even in a lower oil price environment Horizon will spit out $3.5-$5 billion in cash flow per year. He even noted that if WTI oil, which is the U.S. oil benchmark West Texas Intermediate, is down to $70 per barrel for the long-term the company’s total portfolio still profits significantly. Because of this he noted that, “Canadian Natural’s ability to grow and sustain free cash flow while maintaining a strong balance sheet is one of the key factors that differentiates us from our peer group and is unrivaled, in my view.”
What to do with all this cash
Clearly, Canadian Natural Resources expects to enjoy substantial free cash flow even if oil prices remain weak for the long-term. While that’s a good problem to have, it is a problem that needs to be managed. The company know that it can’t waste this money, so it has set up priorities for this cash flow.
Laut laid out these priorities by saying,
“Our free cash flow priorities remain unchanged. [First,] we are fully developing our large resource base. Secondly we can and have returned free cash flow to shareholders that have grown significantly at a 44% CAGR since 2009. Thirdly we can allocate some of the free cash flow to opportunistic acquisitions if they’re available, add value, and strengthen our asset portfolio, as we’ve done in 2014. And finally we can allocate a free cash flow to strengthening the balance sheet, a balance sheet that is already very strong.”
All too often companies need to prioritize debt repayment when commodity prices weaken because of weak balance sheets. However, because Canadian Natural Resources’ balance sheet is strong to begin with, the company doesn’t need to change its priorities now that oil prices are lower.
Despite weaker oil prices Canadian Natural Resources expects its cash flow to continue to rise. Because its balance sheet is strong the company’s priorities for this cash remain won’t change. It still plans to invest in its future while continuing to reward investors, no matter where oil prices go in the years ahead.
