Canadian Natural Resources (TSX:CNQ) is a giant in the Canadian energy sector with vast oil and natural gas production and untapped reserves located in the country’s top energy plays. Investors who missed the big rebound off the 2020 crash are wondering if recent weakness in oil stocks is a good opportunity to add CNQ stock to their portfolios.
Oil market outlook
West Texas Intermediate oil trades for close to US$70 per barrel at the time of writing compared to more than US$120 at the high point last year. Ongoing volatility is expected in the coming months, as fears about a global recession and potential financial crisis bump up against rising fuel demand.
Recent bank failures in the United States are an indication that the negative impact of steep interest rate hikes by the U.S. Federal Reserve are becoming evident. Pundits are concerned that the trend will continue and a wave of bank failures could put the global financial market at risk of another meltdown. The threat of a debt default by the American government is adding to the volatility. If the Democrats and Republicans can’t come to an agreement to raise the debt limit in the coming weeks, there could be added turmoil.
Commodity prices often tank when the financial markets hit a rough patch. If things get ugly, the price of oil could plunge to a new 12-month low. On the demand side, a global recession could take some steam out of the demand rebound that has occurred after the pandemic crash.
Oil bulls, however, say oil prices are likely headed back to US$100 in the next 12 to 18 months. Commuters are being called back to their offices by the millions and airlines are scrambling to order hundreds of new planes to meet soaring demand for air travel. All this translates into significantly more fuel demand.
China’s post-lockdown recovery is also expected to boost demand for oil. At the same time, it is possible the global economy will simply see a soft landing as a result of the measures taken by central banks to reduce inflation. If interest rates start to fall next year, an economic bounce could be on the way.
Producers slashed capital budgets in 2020 and 2021 to protect cash flow. The lack of investment in new production means there is limited scope for increasing output. Large producers are also reluctant to greenlight new projects as government and public pressure increases regarding emissions controls. Investors want excess cash to go into their pockets. For the moment, that seems to be the way oil executives prefer to use the funds.
Is CNQ stock a buy?
CNRL trades near $75 per share. The stock was as high as $88 last year.
Investors get a solid 4.75% yield today on the base dividend, and more bonus distributions could be on the way, as net debt continues to fall. CNRL paid investors a bonus of $1.50 per share in August last year. The current quarterly dividend is $0.90 per share.
CNRL has a strong balance sheet and boasts an attractive asset portfolio. The board raised the dividend in each of the past 23 years, so the payout should be safe. Oil bulls with an appetite for some risk might want to start nibbling at the current share price to pick up some decent passive income and then look to add to the position on any weakness.
Bears who think more downside could be on the way in the coming months might want to wait for a lower entry point or look for other options in the market today.
