Canadian Natural Resources Limited

Canadian Natural Resources Limited (TSX: CNQ) is an independent crude oil and natural gas exploration, development and production company. The Company's exploration and production operations are focused in North America, mainly in Western Canada; the United Kingdom (UK) portion of the North Sea; and Cote d'Ivoire and South Africa in Offshore Africa. 

Why Should Investors Book Profit?

• Increasing uncertainties: The resurgence of Delta variant cases has raised a lot of questions, and it might have an influence on the company's operations and cash flows as the government may tighten some mandatory lockdowns to combat the spread. This could create a volatility in the price and demand of the crude oil.
• Stretched valuations: CNQ shares are available at an NTM EV/Sales multiple of 2.3x compared to the industry (energy) median of 2.0x, while on NTM Price/ Cash Flow multiple, it is trading at 3.8x compared to the industry average of 3.4x. This implies that the shares are overvalued against the industry.
• Lower gross margin against industry: The company is witnessing a lower gross margin, which had fallen on sequential basis. Also, against the industry median the company is commanding lower margins, its gross margin stood at 50.1% in Q2 2021 against industry median of 55.9%.
• Weak liquidity profile: In Q2 2021, the company's quick ratio was 0.60x compared to the industry median of 0.82x. This lower ratio against the industry indicates that the company's short-term obligations are growing faster than its resources to cover them, which is not a good indication.
• Trading above the upper band of the Bollinger Bands®: Recently, the stock witnessed a healthy rally on the daily price chart and has moved above the upper band of the Bollinger band, indicating the stock is perhaps overbought and due for a price correction or a consolidation.

Source: REFINITIV, Analysis by Kalkine Group

Valuation Methodology (Illustrative): EV to Sales

Stock recommendation

The business generated outstanding operational and financial performance in Q2 2021, achieving production volumes of roughly 1,142 MBOE/d and cash flows from operating operations of CAD 2,940 million, thanks to its large and varied asset base. The resurgence in delta variant cases, on the other hand, is creating a lot of uncertainty, and it might have an impact on the company's operations and cash flows. Furthermore, the company's quick ratio is lower, and its cash cycle days are increasing on sequential basis, indicating a weak liquidity profile. Moreover, the technical indicator suggests that stock is perhaps overbought and due for a price correction or a consolidation. Therefore, based on the above rationale and valuation, we recommend a “Sell” rating on the stock at the closing price of CAD 45.60 on September 28, 2021.

Cenovus Energy Inc.

Cenovus Energy Inc (TSX: CVE), is a Canada-based integrated oil and natural gas company. Its operations include oil sands projects in northern Alberta and oil production in Alberta and British Columbia.

Why Should Investors Book Profit?

• Increasing uncertainties: The resurgence of Delta variant cases has raised a lot of questions, and it might have an influence on the company's operations and cash flows as the government may tighten some mandatory lockdowns to combat the spread. This could create a volatility in the price and demand of the crude oil.
• Lower margin profile v/s Industry: In Q2 2021, the company failed on maintaining its pace and witnessed lower performance across operating margin matrix against the industry, which exhibits the pressure on company.
• Weak liquidity profile: In Q2 2021, the company's quick ratio was 0.71x compared to the industry median of 0.82x. This lower ratio against the industry indicates that the company's short-term obligations are growing faster than its resources to cover them, which is not a good indication.
• Long cash cycle days: The company is consistently increasing its Cash Cycle (Days) compared to the previous sequential quarter, implying the company is taking more days to convert its inventory to cash. Currently, its Cash Cycle is at 83.1 days against 68.5 days in Q1 2021.
• Trading above the upper band of the Bollinger Bands®: Recently, the stock witnessed a healthy rally on the daily price chart and has moved above the upper band of the Bollinger band, indicating the stock is perhaps overbought and due for a price correction or a consolidation. Furthermore, the momentum oscillator RSI (14-Period) is trading at ~70.49 levels, which also indicates that the stock is in overbought zone and there is a deep possibility of price consolidation or correction.

Source: REFINITIV, Analysis by Kalkine Group 

Valuation Methodology (Illustrative): EV to EBITDA

Stock recommendation

The company continues to demonstrate the strengths of its integrated portfolio in its second quarter results, generating free funds flow of CAD1.3 billion. However, the company failed on maintaining its pace and witnessed lower performance across operating margin matrix against the industry, which exhibits the pressure on company. Moreover, the resurgence of Delta variant instances is creating a lot of uncertainty, which might have an impact on the company's operations and cash flows. Additionally, its quick ratio is lower, and cash cycle days are increasing on sequential basis, indicating a weak liquidity profile. Even, the technical indicator suggests that stock is perhaps overbought and due for a price correction or a consolidation. Therefore, based on the above rationale and valuation, we recommend a “Sell” rating on the stock at the closing price of CAD 12.56 on September 28, 2021.

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.