Oil and gas prices are rising once again on declining recession fears. The rebound is coming at interesting times as Canada’s energy sector reports bumper quarterly earnings growth. The combined effect could revive TSX energy stocks, which have been trading subdued since June.
Canadian Natural Resources posts solid quarterly performance
Canada’s biggest energy company by market cap, Canadian Natural Resources (TSX:CNQ)(NYSE:CNQ) reported superior Q2 2022 results on August 4. When oil prices were weak in the last few weeks, CNQ stock was among the top losers. However, it is seeing an encouraging recovery after its quarterly earnings gained 20% from recent lows.
Canadian Natural reported a net income of $3.5 billion for the quarter that ended on June 30, registering 125% growth year over year. This superior increase was a result of higher production and sky-high energy prices during the quarter. Apart from the earnings growth, the highlight of CNQ’s earnings was its special dividend.
Canadian Natural declared a special dividend of $1.5 per share, which will be paid on August 31. In addition, the company plans to pay $3 in regular dividends this year. So, the generous special dividend is worth half a year’s payout in a day. For 2022, CNQ is now expected to pay a total dividend of $4.5 per share, indicating a yield of 7%.
That’s much higher than its Canadian bigwig peers. And importantly, a dividend hike for the rest of 2022 is also on the cards for CNQ. So, if crude oil and gas continue to trade strong as they did in the first half of this year, shareholder returns will still be higher.
CNQ: Capital discipline and balance sheet
The energy sector has shown remarkable capital discipline since the pandemic. Companies have not allocated significantly higher capex for production growth despite being in a strong price environment. Instead, they have been repaying debt aggressively with their incremental cash flows.
CNQ has been no different. The Western Canadian oil and gas producer has also focused on deleveraging in the last few quarters. Its net debt has come down from $22.6 billion in December 2020 to $12.4 billion at the end of Q2 2022. That’s a massive balance sheet improvement. With such a sound balance sheet, CNQ will likely be able to raise new debt, if need be, at more favourable terms. Also, a lower debt balance reduces interest expense, eventually improving the company’s profitability.
Even though oil traded subdued in the last few weeks, it was still much higher than last year. So, energy producer companies will still see superior earnings growth in the second half of 2022 compared to 2021. As inflation seems to have calmed a bit, interest rate hikes could also slow, easing the recession fears. Crude oil, in that case, could once again see strong upward movement towards triple-digit levels.
What’s next for CNQ stock?
CNQ stock is currently trading at seven times its earnings, lower than its peers. Its free cash flow yield is around 17%, close to its peers’ average. So, considering the attractively valued stock and improving fundamentals, CNQ stock will likely continue to unlock shareholder value in the long term.
