Last month, OPEC+ (Organization of the Petroleum Exporting Countries) announced that it would lower its oil production by 1.2 million barrels per day from May. With this new announcement, the total output from OPEC and its allies could fall by 3.7 million barrels per day, which is estimated to be around 3.7% of global demand. As expected, the announcement led to an increase in oil prices, thus boosting stock prices of oil-producing companies, including Canadian Natural Resources (TSX:CNQ). Amid the favourable environment, the company’s stock price rose 10% last month.
Despite the rise, CNQ still trades at a discount of over 4% from its 52-week high. So, let’s assess whether the uptrend in the company’s stock price can continue.
CNQ’s 2022 performance
Last month, CNQ reported a solid 2022 performance, with its adjusted net earnings from operations growing by 73.4% while generating cash flows of $19.4 billion from its operating activities. Higher price realization, increased production, and lower interest expenses amid debt repayment drove its financials. With its solid cash flows, the company repaid $3.4 billion of debt, thus strengthening its balance sheet. Over the previous two years, CNQ has reduced its net debt by around 50% to $10.5 billion as of December 31, 2022.
Now, let’s look at its growth prospects and outlook.
CNQ’s growth prospects
Despite the volatility, analysts are bullish on oil. They project Brent crude to reach US$90/barrel by the end of this year. Supply concerns amid the recent production cuts and rising demand, specifically from China, could increase oil prices in the near-to-medium term. Besides, the company has planned to invest around $5.2 billion this year, strengthening its asset base. Supported by these investments, the company’s management expects to increase its natural gas and crude oil production by over 5% this year. Further, the decline in interest expenses amid lower debt levels could boost its financials in the coming quarters.
Meanwhile, CNQ will report its first-quarter earnings for 2023 on May 4. Analysts are projecting the company to report an adjusted EPS (earnings per share) of $1.65, representing a 42% decline from its previous year’s quarter. A lower realized price could weigh on the company’s first-quarter earnings.
Dividends and valuation
Supported by its solid cash flows, CNQ has rewarded its shareholders with dividend growth and share repurchases. Last year, it spent $5.6 billion on share repurchases and $4.9 billion on dividends. The company has extended its share repurchase program this year by repurchasing 6.2 million shares for $0.5 billion as of March 1.
CNQ operates long-life, low-decline assets generating healthy cash flows, allowing it to consistently increase its dividends. Over the last 23 years, it has expanded its dividends uninterruptedly at a CAGR (compounded annual growth rate) of 21%. Its forward dividend yield currently stands at 4.36%.
CNQ’s management had earlier stated that once its net debt falls below $10 billion, it would return 100% of its cash flows to shareholders. With its net debt at $10.5 billion, I expect the company to continue its dividend growth.
Investors’ takeaway
Despite the recent surge in its stock price, CNQ trades at a cheaper valuation, with its NTM (next 12 months) price-to-sales and NTM price-to-earnings multiples at 2.5 and 10.9, respectively. So, given the favourable environment, its growth initiatives, and attractive valuation, I expect the uptrend in the company’s stock price to continue.
