Canadian Natural Resources‘s (TSX:CNQ) stock price is reaching new highs after the company’s 2023 earnings results.
So is Canadian Natural Resources stock a buy today? Motley Fool Stock Advisor Canada advisor Iain Butler shares why he’s still bullish on CNQ from here. (Prefer to read? There’s a transcript below.)
Transcript
Nick Sciple: I’m Motley Fool Canada senior analyst Nick Sciple, and this is the “Five-Minute Major,” here to make you a smarter investor in about five minutes. Today we’re discussing Canadian Natural Resources’s fourth-quarter and full-year 2023 earnings results. My guest today is Motley Fool Canada Chief Investment officer, Iain Butler. Iain, thank you so much for being here.
Iain Butler: Great to be here, Nick. Fun to talk about Canada’s best energy company.
Nick Sciple: Canada’s biggest energy company. We could argue it’s Canada’s best energy company. The market certainly excited about Canadian Natural Resources. Today shares surged about 5% following the earnings release on Thursday, making new all-time highs.
Highlights from Canadian Natural Resources’s earnings
There’s a lot to like about CNQ’s results. It achieved multiple production records for the year. 7% production per share growth — did that while also increasing reserves for the company. Net earnings of approximately $8.2 billion. Adjusted funds flow of $15.3 billion that led to over $7 billion in return to shareholders.
Future payouts to shareholders
Also lots to be excited about on additional capital returns. Going forward, the company has said, when they would achieve a net debt level of $10 billion or less, they were gonna start returning 100% of free cash flow to shareholders. They announced today that that’s going to start here in 2024. Also announced a 2-for-1 stock split. Lots to like both on the operating results and the capital allocation. Iain, what stood out to you about Canadian Natural Resources’s results?
CNQ’s energy reserves
Iain Butler: I mean all that. And we’re throwing around a lot of numbers, but it really is a story that’s told by numbers. And the one that I think still stood out for me especially was CNQ’s proved reserves of 32 years. They’ve got 32 years of energy equivalent in the ground. And if you add probable reserves to that total, it’s up to 43 years. So a big struggle for all commodity producers are they’re on a depleting asset base, and they need to continue plowing money into the ground to find new reserves so that they continue in existence. And here CNQ is with 32 years of proved reserves, which essentially means they’re good to go. So even if they don’t find another barrel of oil equivalent for the rest of my investing timeline, anyway, I think this company is going to keep pumping out the cash, pumping out big numbers like you just went over.
Canadian Natural Resources valuation
Nick Sciple: Yeah. Great assets. Great capital allocation. Really a lot to like. Iain, when you look at shares today at all-time highs, as I mentioned before, how do you think about the valuation for Canadian Natural Resources stock? Are there more returns ahead for shareholders?
Iain Butler: I think absolutely. So for one, energy prices are kind of normalized. I don’t think they’re too high. They’re not too low. They’re just right. So I think they’re producing these numbers in a pretty normal environment for energy prices, which is where we need to start. But then I think when you mentioned that 100% of free cash was gonna be going back to shareholders. We can run through some numbers here, and they generated about $3.8 billion in free cash flow in the fourth quarter. Let’s round that down to $3 billion per quarter going forward just to be conservative. Their existing dividend costs about $1 billion per quarter. They bought back $1.5 billion worth of stock. So that’s $2.5 billion taken from that $3 billion run rate of free cash flow. Which leaves us another $500 million per quarter, or $0.50 per share per quarter, or $2 per share per year of extra money that is just gonna be laying around that they’re going to be giving back to us, whether it be through dividend payments or for their share buybacks. They’re pretty judicious about when they do buy back the stock. So we’re pleased either way. I think we win either way with that formula. And again, they’re gonna keep producing at the current rate for a long, long time and generating a lot of cash over that time period. So I think there’s absolutely a case to be made for just buying this thing and leaving it in a corner of your portfolio and letting it kick out dividends. And then, if we get an appreciating energy price environment, it’s just going to be that much more valuable.
Potential for special dividend
Nick Sciple: Yeah. Would not be surprised to see a special dividend with this extra capital return. We did see a special dividend of $1.50 back in 2022. One other thing to mention. We talked about energy prices. Particular to Canada, we should see realized energy prices for Canadian oil producers increase here in 2024. The trans-mountain pipeline expansion, which has been kicked around for a long time, expected to come online here in 2024. With improved offtake capacity available from the pipeline, we should see the discount that the Western Canadian Select oil benchmark has relative to the U.S., that benchmark should fall. So ever since 2010, that discount has averaged $17 per barrel. According to analysts out there, to move closer to $10 a barrel. That’s an extra $7 per barrel that should fall to Canadian Natural Resources’s bottom line and should juice returns to shareholders. So lots to like. And I think this is a company you can keep holding happily.
That’s all the time we’ve got for this edition of the “Five-Minute Major.” Thank you so much for joining us, and we’ll see you next time.
Iain Butler: Fool on!
