Canada’s biggest energy company by market cap Canadian Natural Resources (TSX:CNQ) reported its first-quarter earnings on May 4. While the numbers came lower than last year, they comfortably beat analysts’ estimates. CNQ stock has returned 5% in the last 12 months, beating TSX energy stocks that have returned around 2%. Even if the recent beat failed to uplift the stock, CNQ remains one of the attractive bets in the sector.
Why CNQ stands tall among peers
Canadian Natural reported total production of 1.3 million barrels of oil per day in Q1, representing a 3% increase year over year. Its net income dropped to $1.8 billion in the first quarter compared to $3.1 billion in Q1 2022. The drop was in line with expectations due to lower oil prices during the quarter. Free cash flow came in at $1.4 billion during the quarter. Many Canadian energy production companies have seen a similar fall due to lower oil prices, even amid higher production.
Canadian Natural stands tall among its peers with its scale and high-quality asset portfolio. The long life, low-decline reserves and solid execution play well for the operational and financial growth of one of the world’s largest independent crude oil and natural gas producers. Its superior balance sheet and ample free cash flow generation opportunities will likely create meaningful shareholder value in the long term.
While Q1 2023 numbers could not boost the sentiment across the stock, CNQ’s higher cash allocation for returns will play a key trigger. CNQ exited Q1 2023 with net debt of $11.9 billion. It aims to bring it down to $10 billion, following which 100% of its free cash flows will be allocated for shareholder returns. The debt reduction might take a couple of quarters more, but it then will likely be a key driver for investor returns.
Dividends and buybacks
Up to May 5, 2023, CNQ has returned approximately $2.8 billion via $1.9 billion in dividends and $0.9 billion in repurchases. CNQ is one of the most reliable dividend payers among North American upstream bigwigs. It has raised shareholder payouts for the last 23 consecutive years, indicating its balance sheet strength. The stock currently yields 5%.
Investors expected a special dividend along with CNQ’s Q1 results. However, the company will be focusing on deleveraging for now and will likely move toward dividends once the debt target is reached.
Its intent to allocate higher cash for shareholder returns implies that the dividends could keep growing. Plus, the downside, in case of lower oil prices, will also likely be limited due to its decent reserve for buybacks.
On the valuation front, CNQ stock trades at 8 times its free cash flows, indicating a premium valuation compared to TSX energy stocks. However, the premium is warranted given the superior position against peers. Its top-quality assets, improving balance sheet, and free cash flow growth justify its premium valuation. Despite the higher multiple, the stock could continue to trade strongly and create decent value.
Canadian oil and gas producers are generating a decent amount of free cash flows even when oil prices are nowhere close to their peaks. The valuations across the board are still depressed even when energy stocks are in their best financial health ever. CNQ is no exception. The industry leader will likely keep delighting shareholders with its all-round performance in 2023 and beyond.