Surprisingly, analysts have revised their outlook for oil sands heavyweight and integrated energy company Canadian Natural Resources Ltd. (TSX:CNQ)(NYSE:CNQ), despite oil prices remaining caught in a contracted slump. In fact, one analyst has reversed his rating for the company from a “sell” to “buy.”
Is now the time to buy Canadian Natural Resources, despite the pessimistic outlook for crude?
Now what?
A key driver for this upgrade has been the success of Canadian Natural Resources’ Horizon oil sands project. For 2014, Horizon delivered a 10% year-over-year production increase, contributing to the company’s record 2014 production that was up by 11% compared to 2013.
Another important facet of Canadian Natural Resources’ operations is that its international assets give it access to Brent oil pricing. Brent is the international benchmark oil price and it is trading at a massive 17% premium to West Texas Intermediate (WTI), the North American benchmark oil price. This gives Canadian Natural Resources a significant financial advantage over those oil companies that are able to obtain only WTI prices.
More importantly, Canadian Natural Resources has a solid balance sheet with a high level of liquidity and low degree of leverage with net-debt a mere 1.5 times cash flow. This endows it with considerable operational flexibility, and when coupled with the cuts made to its 2015 capital expenditure, it is well positioned to maintain its dividend and weather the oil rout.
Another aspect of Canadian Natural Resources’ operations that is quite pleasing is its commitment to continue funding the development of the Horizon project, despite slashing 2015 capital expenditures. On completion in 2017, Horizon’s production capacity will jump to an impressive 250,000 barrels of crude daily and operating costs fall to an equally impressive $25-27 per barrel of crude produced. The end result being that Horizon will be an extremely productive and profitable asset for Canadian Natural Resources, even if crude prices remain at depressed levels for a sustained period.
So what?
Since the rout in crude began approximately six months ago, Canadian Natural Resources’ share price has plunged by almost 30%, leaving it with some very attractive valuation metrics. These include an enterprise-value of eight times its forecast 2015 EBITDA and five times its oil reserves.
When considered in conjunction with the growing success of the Horizon project, its solid balance sheet and ability to offset lower crude prices through its refining operations, Canadian Natural Resources is shaping up to be one of the best-levered bets on a rebound in crude. This makes it easy to understand why its outlook was upgraded, making now the time to invest.
