Why Canadian Natural Resources Limited Is Really Looking Forward to the Future

Canadian Natural Resources Limited (TSX:CNQ)(NYSE:CNQ) sees robust cash flow ahead, even if oil prices stay low.

| More on:
The Motley Fool

It’s a tough being an oil company right now. Commodity prices have fallen to the point where most companies aren’t generating enough cash flow to match their spending needs to keep production flat, let alone grow it. That’s certainly the case at Canadian Natural Resources Limited (TSX:CNQ)(NYSE:CNQ), which recently had to cut its spending guidance yet again in response to weak oil prices.

However, when Canadian Natural Resources looks further ahead, it sees a much brighter future, even if oil prices don’t recover.

2016: A transition year

In response to the continued weakness in oil prices, Canadian Natural Resources recently announced that it will cut its spending even further in 2016. The company now plans to spend between $3.5 billion and $3.9 billion, which is down from its prior guidance of $4.5-5 billion that it gave last November. That’s after cutting its budget several times last year by a total of $3.4 billion, bringing its final spending total to $5.2 billion.

All of these spending cuts are taking a toll on the company’s expected production. While it was able to spend more than enough to grow its production last year, tallying an 8% year-over-year increase, that won’t be the case in 2016. In fact, production is expected to fall 2% at the mid-point to 809,000-868,000 barrels of oil equivalent per day (BOE/d), which is below its initial target of 840,000-850,000 BOE/d.

Having said all that, 2016 is really a year of transition because more than half of its planned spending is being geared towards the completion of its Horizon oil sands expansion project. Phase 2B of that expansion is expected to be complete by the end of this year, with the final Phase 3 expected to be complete by the end of next year.

2017 and beyond: A bright future

Once those two phases are done, Canadian Natural Resources expects its production and cash flow to soar, even if oil prices remain low. In fact, by the end of this year the company sees its cash flow fully covering its capex and dividends going forward, even if oil is $30 a barrel. That’s because it will no longer be spending capital on Phase 2B.

Looking ahead to 2017, the picture brightens even further.

In 2017 Phase 2B will not only no longer be consuming capital, but it will be delivering both production and cash flow. That phase is expected to deliver 45,000 barrels a day in production, which, at a $43 oil price, would fully cover capex and dividends plus deliver an additional $865 million in free cash flow.

Further, once Phase 3 comes online at the end of 2017, the company will add another 80,000 barrels a day of production, which will push its free cash flow up to an expected $2.1 billion in 2018 at a $45.50 oil price.

That excess cash flow gives Canadian Natural Resources a lot of options. It can significantly increase its dividend, start buying back stock, make acquisitions, and even pay down debt. Further, that cash flow could be exponentially greater if oil prices actually recovered closer to the $70-90 a barrel that the industry needs in order to start growing production again.

Suffice it to say, Canadian Natural Resources expects to be a cash flow machine once the Horizon expansion project is finished.

Investor takeaway

For the most part, 2016 is expected to be a wash for Canadian Natural Resources. Due to weak oil prices, cash flow and production are going to be light this year. However, that all changes by the end of this year once Phase 2B of Horizon comes online and starts generating cash flow.

Meanwhile, 2018 is shaping up to be a really robust year because it will benefit from a full year of both Phase 2B and Phase 3, which will generate substantial free cash flow even at low oil prices.

It’s that long-term outlook that has Canadian Natural Resources very excited about what lies ahead.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Matt DiLallo has no position in any stocks mentioned.

More on Energy Stocks

Dollar symbol and Canadian flag on keyboard
Energy Stocks

2 Undervalued Canadian Stocks to Buy in March 2023

With the market on the cusp of a potential rebound, here are two undervalued stocks that should be on any…

Read more »

Gas pipelines
Energy Stocks

Better Energy Stock to Buy: Suncor or Canadian Natural Resources?

Suncor and Canadian Natural Resources are off their recent highs. Are these stocks now good to buy?

Read more »

Financial technology concept.
Dividend Stocks

2 TSX Value Stocks to Buy for Peace of Mind (and a Crazy-Good Deal)

2 TSX stocks that could outperform in the long term.

Read more »

oil and gas pipeline
Energy Stocks

Why Tourmaline Oil Stock Just Fell to 52-week Lows?

The recent correction in Tourmaline Oil stock could be an opportunity.

Read more »

oil and gas pipeline
Energy Stocks

Oil Stocks Are Starting to Get Interesting Again

Oil stocks like Suncor Energy Inc (TSX:SU) are beginning to get interesting again, with oil prices testing new lows.

Read more »

edit Sale sign, value, discount
Energy Stocks

2 Cheap Canadian Stocks You Can Buy for Less Than $50

You can buy Suncor Energy stock, and this gold stock at cheap valuations today

Read more »

green power renewable energy
Energy Stocks

2 Renewable Energy Stocks That Could Put You in the Green

Canadians looking to invest in renewable energy stocks can consider buying shares of Brookfield Renewable Partners and NextEra Energy.

Read more »

A solar cell panel generates power in a country mountain landscape.
Energy Stocks

Is Algonquin Power & Utilities a Buy After Its Fourth-Quarter Earnings?

Given its improving financials, healthy outlook, and attractive valuation, I am bullish on Algonquin Power & Utilities.

Read more »