The bloodbath continues in the oil patch, and investors can be forgiven for steering clear of the entire sector. For those who have a contrarian approach, the sell-off is starting to serve up some interesting deals.
Canadian Natural Resources Limited (TSX: CNQ)(NYSE: CNQ) is one of the top names in the energy group and has fared much better than most of its peers during the past 12 months.
Let’s take a look at the company to see if it deserves to be on your radar right now.
Earnings
Canadian Natural endured a Q2 2015 loss of $579 million primarily due to the 20% tax hike recently implemented by Alberta’s new government. The company reported Q2 adjusted net earnings from operations as $178 million.
Cash flow from operations came in at $1.5 billion, or $1.38 per share. That easily covered the company’s $1.3 billion in capital expenditures, but Canadian Natural Resources also paid out $503 million in dividends, so it had a shortage for the quarter of $300 million.
That is par for the course in the oil sector these days, but it also means investors shouldn’t buy the stock assuming the dividend is going to remain at the same level. Oil prices are significantly lower now than they were through Q2, so the Q3 numbers are probably going to be rough, and a reduction in the payout could be in the cards.
Assets
Canadian Natural owns a fantastic portfolio of diversified assets. The company is one of western Canada’s largest natural gas producers and holds significant heavy oil, light oil, oil sands, and gas liquids properties located in several provinces as well as in the North Sea and offshore Africa.
Canadian Natural generally controls 100% of its facilities. This provides flexibility to move capital quickly to the most attractive assets. For example, the new tax regime in Alberta could push management to shift capital to its extensive assets in British Columbia.
Production growth and cost reductions
The company delivered record natural gas production in the second quarter that exceeded guidance and came in 9% higher than the same period last year. Oil production was strong in the quarter despite shutdowns due to forest fires, and the company still expects to hit the midpoint of its 2015 guidance.
Operating costs have been reduced significantly across all of the company’s producing assets. North American light crude production costs dropped 13%, oil sands costs dropped 20%, and offshore Africa costs fell 25% compared with Q2 2014.
Valuation
Canadian Natural currently trades at 1.2 times book value, which is a steep discount to the five-year average of 1.7 times.
Should you buy Canadian Natural Resources?
Canadian Natural Resources is as good a play as you will find in the sector, and it will certainly be one of the survivors of the downturn, but any bet in the oil space is a risky one at this point because the market is still quite volatile.
If WTI oil prices remain near $40 per barrel for the next few months, Canadian Natural’s share price will certainly take a hit. Having said that, the short-term pain could work out to benefit shareholders because the company is also in a great position to buy up strategic assets at discounted prices.
Long-term investors who believe in the oil story should see any further weakness in the stock as opportunity to pick up a top company at a very reasonable price.
At this point, I would still take a cautious approach and keep the position small until it looks like the oil rout has finally run its course.
