Canada’s largest oil producer Canadian Natural Resources (TSX:CNQ) continues to fire on all cylinders, as demonstrated in its fourth-quarter (Q4) 2022 earnings today. It checks all the boxes with its unique asset base coupled with substantial cash flow generation and an increased focus on shareholder returns.
CNQ stock compared to TSX energy
CNQ stock has returned 15% in the last 12 months, underperforming its peers. However, it has returned 14% compounded annually in the last 10 years, notably beating peers. A large part of shareholder returns came from its consistently rising dividends. It has increased them for the last 23 consecutive years by 21% compounded annually.
Canadian Natural reported a net income of $10.94 billion last year, representing a stellar 43% increase year over year. Higher production amid relatively higher prices played out well for the company. Apart from financial growth, deleveraging has been the key theme across the North American energy space. CNQ repaid $3.4 billion of debt last year, bringing its net debt down to $10.5 billion.
Deleveraging and an increased focus on shareholder returns
Canadian Natural looks well capitalized at the moment with little debt and a strong liquidity position. Moreover, the company’s profitability will likely trend higher in 2023 with declining debt and lower debt servicing costs. For example, CNQ paid more than $900 million in interest expenses in 2019 due to its highly leveraged position then. However, in 2022, those interest expenses have come down to $550 million.
Another important development from CNQ came on the shareholder returns front. CNQ now aims to allocate 100% of its free cash flows to shareholder returns when its net debt reaches $10 billion. Previously, this target was $8 billion. So, the change shows management’s focus on shareholder returns and the company’s strong financial position. CNQ might reach its net debt target in Q1 2023.
CNQ is expected to have free cash flows of over $10 billion in 2023. Considering its consistent buybacks and dividends last year, it might continue to delight shareholders in 2023 as well.
For the last year, CNQ reported free cash flows of $14.3 billion compared to $4.2 billion in 2021.
What does make CNQ special?
Canadian Natural produces 1.3 million barrels of oil equivalent per day, the largest in Canada. It is also the second-biggest natural gas producer in the country. While almost 30% of its production gets the reference price of Western Canadian Select, the rest receives Edmonton par, which trades at a premium. Moreover, a large portion of its natural gas is sold in export markets, which ensures higher realized prices compared to peers.
Its scale and assets with low breakeven price stand tall among peers. Realized oil and gas prices trended lower in Q4 2022 compared to Q4 2021. However, CNQ saw solid bottom line growth and stellar performance all around. If oil prices rise from here, we will likely see CNQ creating more value. Its undervalued stock, healthy balance sheet, visible earnings growth, and juicy dividend yield could continue to play well in the long term.
