Canadian Natural Resources (TSX:CNQ): A Cash Flow and Dividend Machine

Canadian Natural Resources Ltd. (TSX:CNQ)(NYSE:CNQ) will soar as oil moves higher.

| More on:

Higher oil has been a boon for Canada’s beaten-down energy patch. One energy stock that’s often overlooked by investors is oil sands giant Canadian Natural Resources (TSX:CNQ)(NYSE:CNQ). As Canada’s largest oil sands operator producing an average of 1.2 million barrels of oil equivalent daily, the company doesn’t receive the attention it deserves.

Growing earnings

Canadian Natural owns an oil sands focused geographically diversified portfolio of petroleum assets with proven and probable oil reserves of 13 billion barrels.

For the first nine months of 2019, the company’s total oil production remained relatively flat compared to a year earlier. The lack of production growth can be attributed to Alberta’s mandatory production curtailments.

Flat production growth coupled with weaker oil saw cash flow from operating activities plunge by 27% to $6.4 billion and adjusted funds from operations (AFFO) soften by a modest 1% to $7.8 billion.

Despite that weaker performance, Canadian Natural’s net income for the period shot up by an impressive 43% to $4.8 billion. This can be attributed to a lower discount being applied to Canadian heavy crude because of Alberta’s production cuts, a higher netback and gains on commodity as well as currency hedges.

In fact, Canadian Natural’s average realized price of $57.49 for the period was 6% greater than for the equivalent period in 2018 despite the North American benchmark West Texas Intermediate (WTI) being almost 15% lower.

This is due to the price differential between the Canadian heavy oil benchmark Western Canadian Select (WCS) and WTI falling by 46%, giving Canadian Natural’s average realized sales price a solid boost.

A higher sales price coupled with production expenses being 5.5% lower year over year saw Canadian Natural report a netback of $22.17 per barrel sold, which was a healthy 19% higher year over year.

More important, the company continues to be a free cash flow generating machine despite the impact of weaker oil prices during the period.

For the third quarter 2019, Canadian Natural reported that after deducting capital expenditures and dividend payments, it had generated free cash flow of almost $1.5 billion.

This is a significant number for an energy company operating in the current difficult operating environment where extreme volatility and weaker prices are weighing on the profitability of oil companies.

Canadian Natural remains focused on strengthening its balance sheet and used a large portion of its free cash flow to reduce its debt. By the end of the third quarter, the company’s long-term debt totalled $18.5 billion, 4% lower than a year earlier.

That not only increases Canadian Natural’s financial flexibility, but also will bolster its profitability because of lower interest expense and financing costs. The combination of quality long-life, low-cost assets, growing earnings despite the difficult operating environment and stronger balance sheet make Canadian Natural a very attractive play on higher crude.

While shareholders wait for Canadian Natural’s stock to appreciate, they will be rewarded by its regular dividend which is yielding a juicy 3.7%.

That payment certainly appears sustainable given that it has a conservative payout ratio of 43% enhanced by the company’s ongoing moves to strengthen its balance sheet and boost profitability.

Foolish takeaway

While there is considerable risk attached to investing in energy stocks, Canadian Natural shapes up as one of the best plays on higher oil. Its robust balance sheet and ability to generate large amounts of free cash flow in a difficult operating environment makes it stand out from its peers.

For the aforementioned reasons, Canadian Natural is not only an ideal way to profit from higher oil, but also to generate a regularly recurring income stream, making now the time to buy.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Matt Smith has no position in any of the stocks mentioned.

More on Dividend Stocks

analyze data
Dividend Stocks

Here’s Why the Average TFSA for Canadians Aged 41 Isn’t Enough

The average TFSA simply isn't enough for most Canadians in their early 40s. Here's how to catch up.

Read more »

cloud computing
Dividend Stocks

Insurance Showdown: Better Buy, Great-West Life or Manulife Stock?

GWO stock and MFC stock are two of the top names in insurance, but which holds the better outlook?

Read more »

concept of real estate evaluation
Dividend Stocks

How to Earn a TFSA Paycheque Every Month and Pay No Taxes on It

Canadian REITs can turn your TFSA into a monthly paycheque machine for life. Here's how Morguard North American Residential REIT…

Read more »

A plant grows from coins.
Dividend Stocks

The Smartest Dividend-Growth Stocks to Buy With $1,000 Right Now

New dividend-growth investors should consider CN Rail (TSX:CNR) stock and another top play if they're looking to build wealth over…

Read more »

Dividend Stocks

The 3 Top Canadian Stocks to Buy With $1,000 Right Now

If you want consistent income, look to consistent dividend payers. These three stocks are some of the best in the…

Read more »

A worker gives a business presentation.
Dividend Stocks

Want a 6% Average Yield? 3 TSX Stocks to Buy Today

These stocks pay good dividends that should continue to grow.

Read more »

chart reflected in eyeglass lenses
Dividend Stocks

Is Alimentation Couche-Tard Stock a Buy for its 0.9% Dividend Yield?

Couche-Tard stock's small yield is not enticing, but its growth potential could be a wealth creator.

Read more »

Hourglass and stock price chart
Dividend Stocks

5.2% Dividend Yield! I’m Buying This TSX Stock and Holding for Decades!

With its 5.2% dividend yield, Toronto-Dominion Bank (TSX:TD) is a stock I'm eagerly buying.

Read more »