The Motley Fool

Latest Oil Price Collapse Shouldn’t Stop You From Buying This Cash Flow Machine

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The global coronavirus pandemic and economic slump are weighing heavily on energy prices. The international benchmark Brent has lost 95% since the start of 2020 and appears poised to fall further as the OPEC deal for production cuts collapses.

This week has seen a new oil price war emerge, with Russia and Saudi Arabia squaring off over boosting their petroleum output regardless of the consequences for energy prices.

While these fears have seen investors stampede for the exits, sparking a rout among oil stocks, it has created an opportunity to acquire quality energy companies at attractive valuations.

Buy this stock today

One energy stock which stands out for all the right reasons is oil sands heavyweight Canadian Natural Resources (TSX:CNQ)(NYSE:CNQ). Canada’s largest oil sands producer has lost a stunning 27% since the start of 2020, creating an opportunity to acquire a quality play on higher oil at an appealing price.

One of Canadian Natural’s key advantages is its extensive portfolio of low cost, long-life oil sands assets. What investors fail to appreciate is that despite oil sands operations having high upfront costs, they have low operating expenses.

Once commissioned, very little investment is required to maintain oil production because of its extremely low decline rates. In contrast, shale oil, which has high decline rates of 30% or more, forces those drillers to invest considerable capital in exploration and development activities to sustain oil production.

In fact, Canadian Natural has a company-wide decline rate of around 10%, significantly lower than many other oil producers. That means the sustaining capital it needs to invest in its operations is 77% lower than the average of its peers.

These attributes are a key reason why Canadian Natural has been a free cash flow generating machine despite oil’s price collapse. For 2019, Canadian Natural reported record free cash flow of $4.6 billion after net capital expenditures of $4 billion and dividends of $1.7 billion as well as record net earnings of $5.4 billion.

That can be attributed to its low cost assets. Those characteristics will also shield Canadian Natural from the latest oil price collapse.

It also explains why Canadian Natural has been able to reward shareholders by hiking its dividend for a remarkable 19 years straight. This, along with the latest decline in Canadian Natural’s market value, gives it a very tasty dividend yield of 5.6%.

A low dividend payout ratio of 43% indicates that the payment is not only sustainable, but also that Canadian Natural can make additional dividend hikes, even amid the current difficult operating environment.

Foolish takeaway

Even after the latest oil price collapse, Canadian Natural remains a quality dividend growth stock. A combination of quality long-life assets, solid balance sheet and juicy yield coupled with an attractive valuation makes now the time to buy.

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Fool contributor Matt Smith has no position in any of the stocks mentioned.

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