Canadian Natural Resources (TSX:CNQ) is Canada’s largest oil and natural gas producer with a current market capitalization near $83 billion. Investors who missed the big rally in energy stocks off the 2020 lows are wondering if CNQ stock is still attractive and good to buy on a dip for portfolios focused on passive income and total returns.
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 peak last year. The drop is largely due to recession fears triggered by the steep increase in interest rates by the U.S. Federal Reserve and other central banks.
Oil bears are of the opinion that a global economic downturn will hit demand enough to offset the rise in fuel consumption as commuters hit the highways again and travelers book more flights. They also point to a slow economic rebound in China after the country ended its covid lockdown policies.
Oil bulls think the price of oil is not reflecting the current and coming physical supply and demand situation in the market. Demand is expected to increase, even in the face of economic headwinds. On the supply side, oil producers have limited scope or desire to boost output in a meaningful way.
Producers slashed capital spending by hundreds of billions of dollars across the industry in 2020 and 2021 to preserve cash flow. This has a medium-term impact on how much extra oil can be produced to meet increased demand. Exploration and drilling of new fields to replace drained resources is required in conventional production locations and it takes time to get new production online.
At the same time, many major producers are reluctant to sink too much capital into boosting output as they try to meet tight net-zero emissions targets. Shareholders are also pushing oil producers to give them more cash instead of using excess funds to increase output. Finally, Saudi Arabia and its OPEC+ partners recently announced plans to reduce supply to try to keep oil prices elevated.
For the moment, the bears appear to have the edge, but that could change quickly if the central banks are able to deliver a soft landing for the global economy.
Is CNQ a good stock to buy?
CNRL owns a diversified portfolio of oil and natural gas production. The company maintains a strong balance sheet and has the financial clout to make strategic acquisitions at discounted prices when the energy sector hits a major slump. CNRL owns 100% of most of its assets, so it can move capital around the portfolio in an efficient manner to take advantage of shifts in commodity prices. As a result, the board has been able to increase the dividend in each of the past 23 years. This is an impressive performance for a business that relies on commodity markets to determine the price of its products.
At the time of writing, CNQ stock trades near $75 compared to $88 at the peak last June.
Investors who buy the stock at the current price can get a dividend yield of 4.8% on the base dividend. CNRL gave investors a bonus divided of $1.50 per share last August. The company continues to direct excess cash flow to debt reduction and stock buybacks. As net debt continues to fall, management intends to return more cash to shareholders.
Ongoing volatility should be expected, but oil bulls might want to start nibbling on CNQ stock and look to add to the position on any additional downside. The generous dividend pays you well to ride out some turbulence and there is attractive upside potential if oil rebounds to US$100 per barrel.
