CNQ Stock: A Long-Term Value Generator

CNQ stock has increased its dividend by 56% in a little over a year, adding to its solid long-term track record.

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Canadian Natural Resources Ltd. (TSX:CNQ) just released its fourth quarter and year-end 2022 financial results. In summary, the results shine a light on the company’s strengths and potential for shareholder value creation. Here’s why you should consider buying TSX stock CNQ.

Smooth sailing for CNQ

Oil and gas companies are notoriously reliant on strong oil and gas prices. This means that in a high price environment, these companies perform really well. Conversely, in a low-price environment, they struggle immensely.

As an oil and gas company, Canadian Natural certainly has some of this vulnerability. However, there are some very important mitigating factors that shelter CNQ somewhat from this dynamic. Firstly, CNQ is well diversified with top-tier assets in natural gas, crude oil, and upgrading.

Secondly, a large portion of CNQ’s assets are long life with a low decline rate. In fact, 77% of CNQ’s reserves are of this nature. Furthermore, its reserve life index is 32 years. The result of all of this is a business with low capital intensity, and high predictability and stability in all commodity cycles.

Strong 2022 earnings result speaks to the strength of the business

Once again, CNQ benefitted from high commodity prices in 2022. In fact, adjusted funds flow increased 44% to $19.8 billion and free cash flow increased to $10.9 billion. This strong performance was the result of strong oil and gas prices, as well as a 4% increase in production.

So CNQ has been producing results that have been predictable and relatively stable in all commodity cycles. Consequently, CNQ’s stock price has steadily risen over the last 20 years as the company has been consistently supplying the market with the energy it so desperately needs. In turn, this has driven strong, growing, and consistent dividends for CNQ stock.

CNQ is returning boatloads of cash to shareholders

With free cash flow of $10.9 billion, one of CNQ’s biggest “problems” is what to do with all that money. It’s a great problem to have, that’s for sure. And management has been very focused on where to deploy this cash. First of all, one of the most important things to do in the good times is to strengthen the balance sheet. This leaves a company able to handle the bad times when they come. And they always do come, especially in a commodity business like oil and gas.

So, CNQ has taken this to heart and embarked on a plan to reduce its net debt to a more acceptable level. In fact, during the year, the company reduced its net debt by $3.4 billion. Today, CNQ has $10.5 billion in net debt, with a clear line of sight to reducing it to $10 billion later this year.

This is an important point to note. It’s important because management has stated that once they get to $10 billion in net debt, 100% of free cash flow will be returned to shareholders. At a debt level of below $15 billion, 50% of free cash flow was returned to shareholders.

Within this context, the company increased its dividend twice in 2022 and once again this week for a total increase of 56% since the end of 2021. This is in addition to paying a special dividend of $1.50 per share in August of 2022.

All considered, CNQ stock is a TSX stock to consider for its accelerating shareholder returns and strong business that generates long-term value. Today, oil is trading just below $80, a constructive price range, so I expect CNQ and its stock price to continue thriving in this environment.

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.

Fool contributor Karen Thomas has a position in Canadian Natural Resources. The Motley Fool recommends Canadian Natural Resources. The Motley Fool has a disclosure policy.

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