Canadian Natural Resources Has More Room to Run

Canadian Natural Resources' expected double-digit production growth allows for significant future upside, while the solid long-life asset base provides enough downside protection.

Jul 7, 2014 at 8:56AM

2014 has been a strong year for Canadian energy stocks. Profits are rising at the fastest pace in a decade as global economic growth pushes up oil prices and worries over pipeline bottlenecks fade. Geopolitical tensions have also added to the revival of the Canadian energy stocks, which are trading at a three-year high. 

As you can see from the chart below, Canadian Natural Resources (NYSE:CNQ), Suncor Energy (NYSE:SU), Crescent Point Energy (NYSE:CPG), Canadian Oil Sands (TSX:COS), and Imperial Oil Limited (NYSEMKT:IMO) all have seen a significant increase in value this year.


Source: Google Finance.

The outperformer
However, this rally is not over yet, and there is more room to run for these companies, as prices for heavier Canadian crude catches up with benchmark West Texas Intermediate. The underlying fundamentals remain strong, domestic prices for oil and prices are climbing, profits are rising, and investors are recognizing restructuring efforts.

Year to date, Canadian Natural Resources has outperformed most of its major pure oil exploration and production (E&P) peers and domestic integrated oil sands peers by a significant margin. Despite this strong performance, I believe there is more room to run for Canadian Natural Resources. While the company's projected strong double-digit liquids production growth allows for significant future upside, its solid long-life asset base provides enough downside protection.

Long reserve life portfolio with significant expansion portfolio
Canadian Natural Resources is one of my favorite Canadian energy stocks. The company has built a highly attractive oil-oriented, long reserve life portfolio with significant expansion potential. The company provides investors a compelling opportunity to position themselves for secular higher oil prices and structurally limited supply. The company not only offers upside potential, but also minimum political risk as almost 95% of the company's production comes from either Canada or the U.K. 

Canadian Natural Resources maintains a large and balanced portfolio of assets. The company's balanced portfolio plays an important role in the company's future growth, free cash flow, and value upside. At its recently held investor open house, the company provided a review of its major business segments, highlighting its deep and balanced resource base and transition to a long life liquids producer. Canadian Natural's deep dive into its assets also highlights the strong portfolio it has beyond Horizon.

A production CAGR of 9%
With Kirby South ramping up in line with expectations and Horizon continuing to perform well, Canadian Natural Resources is expected to grow its production at an impressive 9% CAGR for the next five years. The growth is expected to be mainly driven by thermal, heavy oil, and Horizon volumes. As a result, long-life production is expected to grow from roughly 40% of total liquids production in 2011 to more than 60% by 2018.


Source: Company documents.  

Returning excess cash to shareholders remains a priority
Driven by a ramp-up at Horizon, Canadian Natural Resources is expected to grow its operating free cash flow by 37% before reaching $6-$7 billion starting in 2018. While some of the free cash flow growth may be used for acquisitions or to accelerate development, the recent 80% increase in the dividend ($0.225 from $0.125) serves as a signal that returning cash to shareholders via dividend increases and share buybacks will remain a focus. The company can also use excess cash for debt reduction.


Source: Company documents.  

Royalty spinoff
Canadian Natural Resources has royalty income in the $140 million-$150 million range. The company continues to explore the potential to unlock value through a sale, spinoff, or IPO of its royalty stream. The company is working to fully understand the asset to maximize value, and a decision is expected by year end.

Foolish takeaway
Canadian Natural Resources has outperformed most of its major, pure-oil E&P peers and domestic integrated oil sand peers year to date. The recent tightening of the Canadian oil price differentials and improved and more reliable operating performance at Horizon have contributed to the recent rally. Going forward, while the company's expected double-digit production growth allows for significant future upside, Canadian Natural Resources' solid long-life asset base provides enough downside protection. 

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Jan-e- Alam has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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