What to Watch When CNQ Reports its Q1 Earnings Next Week

CNQ stock has returned 8% in the last 12 months and 370% in the last three years.

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The first-quarter (Q1) earnings season is off to a mixed start. The country’s largest energy company by market cap Canadian Natural Resources (TSX:CNQ) is set to release its Q1 earnings on May 4. CNQ stock has returned 8% in the last 12 months and 370% in the last three years. It will be interesting to see if its upcoming numbers send the stock higher.

CNQ is one of the high-quality names in the Canadian energy space. Its scale, dividends, and balance sheet strength notably stand out among its peers.

Will CNQ stock surge next week?

Canadian Natural intends to produce 1.35 million barrels of oil per day this year, representing a 6% increase year over year. It aims to invest $5.2 billion in capital projects in 2023. It lowered its net debt target for the year, which will facilitate higher shareholder returns. Buyback and higher base dividends will likely delight investors.

According to analysts’ estimates, CNQ will report earnings of $1.74 per share for the quarter that ended on March 31, 2023. In comparison, it reported earnings of $2.86 per share in Q1 2022. Lower revenues due to weak oil prices and high operating expenses will likely weigh on its bottom line.

Deleveraging and dividends

However, the company is expected to see stellar free cash flow growth compared to its historical standards. As the debt target has already been eased, CNQ is expected to be left with a huge cash hoard this year. So, a large portion of this excess cash will likely be utilized for buybacks and dividends.

Canadian Natural had a net debt of $11.5 billion at the end of Q4 2022. How much of its debt was repaid in Q1 2023 will be crucial to watch. That’s because the management aims to allocate 100% of its free cash flows to shareholder returns once its net debt falls below $10 billion.

This has been a tremendously positive development for the company and its investors. CNQ’s leverage used to be beyond three before the pandemic due to its large debt burden. At the end of Q4 2022, its leverage ratio dropped to 0.5. That signifies its balance sheet strength and will likely improve profitability as well.

CNQ has already increased its 2023 dividend by 16% to $3.6 per share. That marked a 23rd consecutive shareholder payout increase. That’s quite a noteworthy achievement given the sector’s less financial visibility amid volatile oil prices.

Importantly, Canadian Natural will likely increase its dividend further this year. Aggressive buybacks have lowered the number of outstanding shares since last year. This makes existing shares more valuable.

Valuation and conclusion

CNQ stock has returned 8% so far this year, which is in line with its peers. It is currently trading at a price-to-free cash flow ratio of eight and a price-to-earnings ratio of 10. That indicates a rich valuation compared to its peers. However, given its scale and dominant position, CNQ warrants a premium valuation. Its upcoming quarterly earnings will likely push the stock higher if there is reasonable visibility regarding the 100% allocation of free cash to shareholder returns.

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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