After witnessing a decline for the previous three months, the Canadian equity markets have bounced back strongly this month, with the S&P/TSX Composite Index rising 4.6%. With the Federal Reserve deciding not to raise its benchmark interest rates for the second consecutive time, investors believe the interest rate hikes are over for this year. This optimism has driven the equity markets higher. Despite the recent increases, the Canadian benchmark index is trading just 1.9% higher this year.
However, Canadian Natural Resources (TSX:CNQ) has outperformed the broader equity markets by delivering over 25.5% returns this year. Rising oil prices amid supply concerns due to the ongoing Israel-Palestine conflict and solid quarterly performances have driven the company’s stock price. Let’s assess whether the rally could continue or if investors should book their profits at these levels. First, we will examine its performance in the recently reported third quarter.
CNQ’s third-quarter earnings
CNQ delivered solid operational performance in the September-ending quarter, with average quarterly production volumes at 1.4 million barrels of oil equivalent per day. This represented a 4% increase from the previous year’s quarter, boosted by record production in both liquids and natural gas. Despite posting the highest quarterly volumes in the company’s history, adjusted net earnings and adjusted fund flows declined by 18.4% and 9.9%, respectively.
Lower price realization compared to its previous year’s quarter dragged the company’s financials down. Meanwhile, management has adopted a policy of returning 50% of its cash flows to shareholders, provided its net debt lies between $10 billion and $15 billion. With net debt at $11.5 billion, the company has paid $1.6 billion to shareholders this quarter – around $1 billion in dividends and $600 million in share repurchases. Now, let’s look at its growth prospects.
CNQ’s growth prospects
Although the recent developments in the Middle East have not directly impacted the oil supply, many fear the escalation could hurt future supplies. Also, analysts are projecting oil prices to remain elevated in the near-to-medium term. Goldman Sachs has given a first-quarter 2024 price target of US$95/barrel for Brent crude, representing a 10% increase from its current price. Also, its diversified sales points could limit its exposure to one particular market, thus stabilizing its financials.
After making a capital investment of $4.3 billion in the first three quarters, CNQ could invest another $1.1 billion in the final quarter to boost its production capabilities. Also, the company is working on lowering its net debt to below $10 billion, which it expects to achieve in the first quarter of 2024. On reaching the target, the company will repay 100% of its cash flows to shareholders as dividends and share repurchases. So, CNQ’s outlook looks healthy.
Investors’ takeaway
Despite an over 25.5% increase in share price, CNQ trades at attractive valuations. NTM (next 12 months) price-to-earnings is at 10.6 times analysts’ projected earnings for the next four quarters. Also, the company’s board recently raised its quarterly dividend by 11% to $1.00/share, marking 24 consecutive years of dividend hikes. Meanwhile, its forward yield stands at an attractive 4.39%.
So, considering its growth prospects and attractive valuation, I believe the rally in CNQ could continue. So, I am bullish on CNQ.
