Oil prices – they’ve been notoriously volatile and difficult to predict. Yet, the rise in oil prices in the last few years can be easily explained by falling supply, rising demand, and increasing geopolitical risk. So, as we head into the future, which stocks will benefit the most as the crude oil price continues to rise?
Canadian Natural Resources: Big boost from crude oil prices
Many of us already know about Canadian Natural Resources Ltd. (TSX:CNQ). This is because it’s one of Canada’s largest and most successful oil and gas companies, with a $99 billion market capitalization and long history of shareholder value creation.
Oil prices currently stand at almost US$82 per barrel. This is pretty much in line with where they ended 2022, but 27% higher than 2018. Clearly, oil prices have been good to oil and gas companies and investors in this time period.
With 91% of its production coming from crude oil, Canadian Natural Resources has benefitted greatly from this boom. Its revenue has more than doubled, and its net income has increased more than fourfold to $11 billion in 2022. Finally, its cash flows have been soaring, with free cash flow coming in at $2.7 billion in the company’s latest quarter alone. It’s not surprising, then, to hear that CNQ has raised its dividend by a cumulative 163% during this time period.
As a smaller oil and gas company, Baytex Energy Inc. (TSX:BTE) is also a little more volatile. It does not have the size and scale of CNQ, nor the deep financial pockets. However, Baytex also stands to benefit big when oil prices are rising. And this is why it makes my list here today.
Its assets include crude oil and natural gas assets in the Western Canadian Sedimentary Basin and Eagle Ford in the United States. This is a high quality, well-diversified portfolio of assets with 12 or more years of drilling inventory.
Like CNQ, Baytex’s production is heavily weighted toward crude oil. In fact, 85% of its production comes from oil and natural gas liquids. This means that this company is heavily leveraged to rising oil prices. In preparation of just this environment, Baytex has been making some very attractive “oily” acquisitions recently.
The most recent one is Baytex’s $3.4 billion acquisition of U.S. oil and gas company Ranger Oil. This acquisition expanded Baytex’s presence in the Eagle Ford shale resource in Texas. Also, it adds 67,000 to 70,000 barrels of oil equivalent per day (boe/d) of production to Baytex.
This acquisition sets Baytex up with more exposure to oil production. It positions the company well in the event that oil prices remain strong. For example, it will more than double the company’s EBITDA and almost double its free cash flow. Importantly, management has committed to use 50% of this free cash flow to pay down debt and 50% for shareholder returns.
The bottom line
The price of oil continues to be supported by geopolitical tensions, strong demand, and dwindling supplies. If this continues, the upward bias for oil prices will continue. In this case, Canadian Natural Resources stock and Baytex stock will very likely continue to perform well.