The last year was tough for energy companies as the collapse in crude sharply impacted the energy patch and brought the viability of a number of heavily levered oil companies into question. Despite the ongoing weakness of crude, Canadian Natural Resources Limited (TSX:CNQ)(NYSE:CNQ) has continued to perform strongly. This makes it easy to understand why the company has become one of the most respected operators in the energy patch.
Let me explain.
Now what?
Even after reducing its 2015 capital expenditure by a whopping $3.4 billion in response to weak crude, the company still reported 8% growth in production for that year.
More impressively, it reported a reserve replacement ratio of 179% for 2015, indicating that it was able to replace its oil reserves at a far greater rate than its oil production caused them to fall. This is a particularly important number to consider in an operating environment where exploration and development expenditures have been substantially reduced.
These numbers also highlight the high quality of Canadian Natural Resources’s assets and the sustainability of its operations.
More importantly, the long-term outlook for Canadian Natural Resources remains positive, despite the sharp collapse in crude and signs that the recent rally in crude will come to an end. This is because the company remains focused on moving to a long-life, low-decline-rate asset base.
As a result, the development of the Horizon oil sands project remains underway with the Horizon Phase 2B expansion less than seven months away from commencing production. On completion, this will add an additional 45,000 barrels of daily oil production. Canadian Natural Resources also continues to invest in developing the Horizon Phase 3 project, which is scheduled for completion by the fourth quarter 2017 and will add an additional 80,000 barrels of crude daily.
The importance of the Horizon expansions can’t be stressed enough because industry insiders and analysts believe that by 2017 crude will have recovered substantially from current levels. This means that the completion of phase 2B and phase 3 will leave Canadian Natural Resources well positioned to take advantage of firmer oil prices.
It has also been able to successfully slash costs to the point where its cash costs per barrel are about $24, which is lower than the price for West Texas Intermediate and Brent crude. This is quite impressive and highlights how Canadian Natural Resources has remained cash flow positive despite the harsh operating environment.
Canadian Natural Resources also remains committed to cutting costs even further; operational costs in 2016 are expected to fall by 6% for its oil operations and 8% for natural gas. This will further assist the company in weathering the storm created by weak crude prices.
So what?
While the collapse of crude has had a sharp impact on the patch, it has also been quite beneficial. It has forced Canada’s energy companies to improve the efficiency of their operations, cease the development of marginal assets, and significantly reduce costs.
This means that these companies that are not only able to survive the current harsh operating environment, but are also able to expand their oil output. When oil prices rally, Canadian Natural Resources’s margins will grow, and that will leave it well positioned to unlock considerable value for investors.
