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This Top Oil and Gas Producer Has Huge Upside

The WTI oil price has fallen from more than US$70 per barrel to about US$52 per barrel very quickly in about two months. To make it worse, Canadian oil tends to sell at a discount to the WTI, partly because there are costs involved in transporting oil to the U.S. refineries. Natural gas prices also remain low in Canada.

Low commodity prices have undoubtedly put a drag on many oil and gas producers, including Canadian Natural Resources (TSX:CNQ)(NYSE:CNQ). However, as one of the largest oil and gas producers in Canada, Canadian Natural Resources is holding up better than many others as it continues to be profitable and generates significant cash flow.

Oil and gas producers are challenged by the lack of access to its markets with pipelines operating at full capacity. Some producers have even resorted to transporting oil by rail to the U.S. Therefore, Enbridge’s Line 3 replacement project, which is expected to come online in the second half of 2019, will be warmly welcomed, as it’ll increase pipeline capacity.

Canadian Natural Resources’s plans for 2019

Canadian Natural Resources estimates 2019 production levels of about 1.03-1.12 million barrels of oil equivalent per day and a product mix of about 76% crude oil and natural gas liquids and 24% natural gas.

Canadian Natural Resources aims to invest about $3.7 billion in 2019, of which about $3.1 billion (about 84%) will be sustaining capital that will maintain its production levels, while the remainder will be used for long-term growth projects.

If the industry dynamics improve, the company has the flexibility to increase its investments by about $1 billion to its normalized levels. So, the company’s 2019 production-per-share growth will likely be lower than its long-term target rate of 7-8%.

Canadian Natural Resources is profitable

Canadian Natural Resources remains very profitable with a recent net margin of 16.8%. In fact, it boasts a liquids free cash flow breakeven WTI oil price of about US$39 per barrel.

Furthermore, it generates significant cash flow. For example, in the first nine months of the year, it generated about $8.7 billion of operating cash flow with about $3.9 billion left over after repaying some debt, paying out dividends, and buying back some shares.

Investor takeaway

The oil and gas industry is tough to operate in, but Canadian Natural Resources is one of the best companies in the space. If commodity prices rise, there will be significant upside in the stock.

Thomson Reuters currently has a mean 12-month target of $52.60 per share on the stock, which represents near-term upside potential of about 51% from $34.80 per share as of writing. The stock also offers a sustainable 3.85% dividend yield. Interested investors should carefully look for a bottom to start easing into the stock.

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Fool contributor Kay Ng owns shares of Enbridge. Enbridge is a recommendation of Stock Advisor Canada.

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