Oil prices are down, natural gas prices remain weak, and the arrival of a new major oil pipeline to help Canadian producers get their product to market remains uncertain.
Given the negative overall near-term outlook, investors have avoided the Canadian oil patch and the share prices of energy producers are down significantly from their 12-month highs.
Ongoing challenges should be expected, but contrarian investors with an eye for opportunity are starting to kick the tires on the top names in the sector.
CNRL is a major oil producer in Canada, with oil sands as well as conventional light and heavy oil production facilities. Its international assets include sites in the North Sea and offshore Africa.
The price of West Texas Intermediate (WTI) oil is down to US$53 per barrel, and Western Canadian Select (WCS), which normally trades at a discount to WTI is currently at US$37 per barrel. That’s much better than the US$11 WCS fetched late last year before Alberta imposed supply restrictions, but well off the 2019 high of US$55 we saw in the spring.
The market remains volatile and investors should expect sharp short-term moves to continue amid ongoing uncertainties in the global geopolitical and economic arenas.
Oil bears are in the driver’s seat right now as the ongoing trade dispute between the U.S. and China has traders concerned that a global economic downturn will hurt oil demand.
The bulls, however, suggest a deal could be reached in the coming months, and any news to that effect would send prices higher. In addition, the attack on Saudi Arabia’s facilities in September briefly sent oil soaring by 20%. Any new disruptions that take a big chunk of supply off the market for an extended period could quickly push WTI oil back toward US$70 per barrel.
The U.S. blamed the attacks on Iran. In the event Saudi Arabia decides to make a military response, oil prices could take off in a big way and remain high, as traders implement a risk premium.
Back in Canada, the pipeline issue is a key point of focus in the federal election, and the wide gap in public and political opinion between those who want pipelines built and those that oppose them will continue to make it difficult to get Alberta’s oil to the coast where it can be shipped to foreign markets.
That said, Trans Mountain could still be completed. In addition, the Keystone XL and Line 3 replacement pipelines that would run down through the U.S. also have a chance of being finished.
Should you buy CNRL today?
CNRL has a strong balance sheet and management is looking well beyond the current challenges in the market when setting out the company’s objectives. This is evident in the company’s decision to acquire Devon Energy’s Canadian assets for $3.2 billion this year.
CNRL does a good job of taking advantage of weak market conditions to add resources and production at favourable prices.
Adjusted earnings for the second quarter of 2019 came in at a solid $1 billion. The company continues to pay an attractive dividends and is using excess free cash flow to buy back shares and reduce debt.
The board raised the dividend by 12.5% in 2019 and investors should see steady hikes in the distribution in the coming years. The current payout provides a yield of 4.5%.
At the time of writing, the stock trades at $33 per share compared to the 12-month high of $42 we saw in April. Given the strength of the balance sheet and the diverse resource base, investors might want to start nibbling on the stock at this level.
You get paid well to wait for the market to improve and any strong recovery in the energy markets should send the share price significantly higher.