Whether you’re bullish or bearish on the oil and gas sector in North America, deeply discounted valuations and strong dividend growth should be enough to make you turn your head.
There’s much to be said about the energy industry, mostly pointing to the negative. So much so that I’d avoid most all junior companies right now.
But anyone steering clear of the whole industry may be making a mistake, as there are plenty of major players right now that provide excellent value. One of those companies is Canadian Natural Resources Ltd.
One of the biggest oil and gas producers in Canada, Canadian Natural Resources (TSX:CNQ) has grown revenue from $12.36 billion in 2015 to $21.03 billion in 2018 amidst weak oil prices and pipeline disputes.
With $2.8 billion in cash flows from operating activities in its most recent quarterly filing, this represents a 185% increase from the year prior. And with CAPEX in the first half of 2019 coming in significantly under budget, the company continues to show why it is one of the best discount producers in North America.
Strategic buys have placed Canadian Natural (TSX:CNQ) in a strong position
During a bear market like we are witnessing right now with the oil and gas sector, you’d figure companies would batten down the hatches, reduce spending and wait for things to turn around.
Canadian Natural is doing exactly the opposite. I was extremely pleased with the company’s acquisition of Shell’s 60% stake in the Athabasca Oil Sands Project, which further entrenched the company’s roots in the Alberta Oil Sands and its commitment to Canada. To go along with this, an increase to the company’s bottom line production to the tune of 195,000 bbl/day doesn’t hurt either.
More recently, Canadian Natural purchased Devon Energy’s northern Alberta oil sands and heavy operations in May of this year. This moved Canadian Natural towards becoming the largest producer in the country, with the capacity to produce over 1.2 million barrels a day.
The acquisition of Devon is the company’s seventh major acquisition since oil tumbled in 2014. Canadian Natural is taking advantage of current market weakness, and is positioning itself to prosper when what I feel is an inevitable market recovery.
The most lucrative thing about Canadian Natural? Its dividend
There’s plenty of Canadian companies that are offering faster growing dividends than Canadian Natural. However, most of these companies provide low or near non-existent yields.
A prime example would be Enghouse (TSX:ENGH). The company has a five year dividend growth rate of 18%, but its yield sits at a mere 1.09% at the time of writing.
With Canadian Natural, you get a 3.8%+ yield to go along with a 5 year growth rate of 18%. Sure, its most recent increase of 11% falls quite shy of its 5 year average, but considering the company is a Canadian Dividend Aristocrat with a 18 year dividend growth streak, at this point I’m happy with any sort of double digit increase.
Canadian Natural is a cash flow hog, with operating cash flows in excess of $10 billion in 2018. Due to CAPEX being one of the lowest of the major players in the industry, Canadian Natural produced nearly $6 billion in free cash flows in 2018. Similar giants in Suncor and Imperial Oil produced $5.1 billion and $2.4 billion, respectively.
Canadian Natural’s dividend accounts for only 49% of the company’s free cash flows, suggesting there is a lot more room for growth.
Negative sentiment has resulted in Canadian Natural trading at a deep discount
Canadian Natural hasn’t traded at price points this low since crude oil traded in the mid $30’s in May of 2016. The company posted revenue of $10.52 billion in fiscal 2016, a number it has already surpassed thus far in 2019 with revenue through six months sitting at $10.8 billion.
The market is currently valuing Canadian Natural at 14 times forward earnings. This is below major competitors such as Imperial Oil (14.95) and Suncor Energy (14.10), and is hovering right around industry averages.
Although there isn’t much of a gap between major players, Canadian Natural is outperforming in many areas.
- Net profit margins of 12.31%, considerably higher than those of Suncor and Imperial Oil, with profit margins of 8.54% and 6.60% respectively.
- 5 year EBIDTA CAGR of 4.52%, well above the -0.12% of Imperial and 1.25% of Suncor.
- Netbacks of $19.25 reported in the first quarter of 2019.
Overall, Canadian Natural provides a solid option in a weak market
If you’re looking for a contrarian play, I’d place Canadian Natural as the best in class in terms of major oil and gas players. The stock currently trades at $39.85, and looking at one year price estimates placed by analysts, they figure there is 13% upside from today’s price levels, even after it’s most recent price surge.
The turnaround for the industry may take some time, and on a whole a Liberal minority government won’t do much in terms of accelerating pipeline development. But, the government didn’t buy the pipeline to bury it. It will eventually get built, and when it does producers in the Alberta Oil Sands will stand to benefit.
In the mean time, sit back, collect the 3.8% dividend and grab a stock that’s trading at a deep discount, not because of a lack of performance, but because of bearish outlook on the industry as a whole.
**Daniel Kent holds a position in CNQ.TO