Why CNQ Stock Looks Like a Good Buy in February 2023

CNQ stock has returned 15% in the last 12 months, underperforming TSX energy peers.

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Strong earnings growth and balance sheet improvement drove massive shareholder value in the Canadian energy sector last year. This year, a larger free cash flow allocation to shareholder returns will be a key growth driver.

So, the energy sector will likely continue to play well in 2023, despite the recent downtrend. Notably, among Canadian energy bigwigs, I think Canadian Natural Resources (TSX:CNQ) is an attractive bet. Its low-cost assets and strong dividend profile stand tall among its peers.

Should you buy CNQ stock?

Canadian Natural Resources is Canada’s largest oil producer by market cap and volume. With a record $5.2 billion of capital expenditures, CNQ intends to produce 1.4 million barrels of oil per day in 2023.

Higher production and expected superior oil prices will likely drive notable financial growth for CNQ this year. Moreover, lower debt due to last year’s deleveraging efforts should improve its bottom line this year. So, ultimately, a higher chunk of free cash flows will be used for shareholder dividends.

CNQ returned more than $10 billion of cash to shareholders last year in a combination of dividends and share repurchases. In 2023, it is expected to see free cash flows of around $10 billion. Free cash flows are calculated as the difference between cash flow from operations and capital expenditures.

Strong dividend profile and growth outlook

In 2023, CNQ will pay a dividend of $3.40 per share, indicating a juicy yield of 4.3%. It has increased shareholder dividends for the last 23 consecutive years. That’s a rare feat for a risky industry like energy.

With its sound balance sheet and stable earnings, CNQ will likely keep raising shareholder payouts in the foreseeable future. Notably, during the pandemic crash as well, Canadian Natural kept its dividend growth streak intact when almost the entire energy sector cut or suspended dividends.

Canadian Natural’s assets is a key competitive advantage over peers. Its large low-cost asset base, with a low decline rate, offers immense growth prospects in the strong price environment. Moreover, its exposure to diversified premium markets south of the border obtains higher realized prices and gains superior margins. To be precise, the country’s second-largest natural gas producer CNQ sold 36% of its natural gas in export markets last year, which obtained much higher prices than local benchmark AECO prices.

CNQ stock has returned 15% in the last 12 months, underperforming TSX energy peers. However, it looks well placed to outperform in the long term with its fundamental strength and undervalued stock.

It is currently trading six times its 2023 earnings, lower than peers. Also, it is trading at a free cash flow yield of 12%. While the industry average free cash flow yield currently stands at 15%, CNQ’s yield makes the stock look richly valued. Yet, it deserves a premium valuation due to its scale and superior market position.

A boost from stock buybacks

Despite the fundamental strength, CNQ stock will likely be largely influenced by oil prices. While the demand-supply imbalance indicates higher oil prices, more rate hikes and a potential economic downturn will continue to weigh on them. Nonetheless, CNQ remains an attractive bet in the TSX energy sector, driven by its strong execution, stable dividend profile, and accelerated buybacks in 2023.    

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.

The Motley Fool recommends Canadian Natural Resources. The Motley Fool has a disclosure policy. Fool contributor Vineet Kulkarni has no position in any of the stocks mentioned.

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