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Canadian Natural Resources (NYSE: CNQ) is an oil and gas producer with an outstanding track record of shareholder value creation, one I strongly believe will continue well into the future. Just consider the following table of annual growth for the 10-year period ended December 2006.

Daily production per share


Conventional reserves per share


Cash flow per share


Conventional pre-tax net asset value per share


Source: Canadian Natural Resources.

A management team that good at looking after shareholders should immediately grab your attention. Better yet, CNR's Horizon oil sands project in Alberta, Canada, will produce enough reserves to last for roughly four decades. This company has precious fossil fuel reserves in a stable country, right next door to the world's largest oil-consuming nation.

One of Canada's largest natural-gas producers, the company also produces conventional crude oil in Canada, the U.K. North Sea, and West Africa. These assets have the potential to expand from today's production levels of approximately 1,650 mmcf/day of natural gas and 330 mbbl/day of conventional crude oil and natural gas liquids (NGL).

Growth on the Horizon
Phase 1 of the Horizon project is set to start producing synthetic crude oil (SCO) from the tar sands in Northern Alberta. Once fully up to speed, phase 1 is expected to produce around 230,000 barrels/day. Initially, the cost of production will be close to $30/barrel, but over the lifetime of the Horizon project, the company estimates that the costs will fall closer to $20/barrel. Over the years, the company intends to expand its production to 500,000 barrels/day. At today's oil price of around $90 per barrel, the economic opportunity is simply staggering.

Oil companies always operate at the capricious whim of governments. Recent examples include Russia blackmailing BP (NYSE: BP) and Royal Dutch Shell (NYSE: RDS-A) (NYSE: RDS-B), and Venezuela's Hugo Chavez leaning on ExxonMobil (NYSE: XOM), ConocoPhillips (NYSE: COP), and a host of other Big Oil players. In CNR's case, Alberta's provincial government has raised the royalties on oil and gas so high that the company is reducing its gas exploration targets in the province, instead looking for other options overseas.

The phase 1 Horizon project is close to 90% complete, but the company could experience considerable increased costs for later phases. The Northern Alberta oil industry is booming, and recruiting appropriate staff may prove costly. The company took on considerable debt to get the Horizon project going, and its debt/equity ratio now stands at 85%. However this is already down from more than 100% in 2006, and the company should easily manage future expansion from internal cash flows, especially when Horizon starts producing. In the short term, low oil and gas prices would cause the stock price to drop -- which I would consider an excellent buying opportunity.

Foolish bottom line
By my estimates, this company is undervalued at today's $65-per-share price, but as a quick check of its 52-week trading range will confirm, the share price is governed in the short run by the price of oil and gas. I'd happily buy the shares today, but I'd positively salivate if they dropped below $50 again.

Fool contributor and Inside Value lead investor Philip Durell does not own shares in any of the companies mentioned. He regrets that he didn't pull the trigger last time Canadian Natural was in the $40's. The Motley Fool has a disclosure policy.