blue-chip

Three TSX Listed Stocks to Hold – CNQ, IMO and BLX

Aug 09, 2021 | Team Kalkine
Three TSX Listed Stocks to Hold – CNQ, IMO and BLX

 

Canadian Natural Resources Limited

Canadian Natural Resources Limited (TSX: CNQ) is a leading oil and natural gas production company, which has operations across Western Canada, the U.K. portion of the North Sea and Offshore Africa.

Key Highlights:

  • Surge in dividend distribution amidst turbulent times: Despite the ongoing economic turbulence, the company reported a higher dividend distribution of CAD 1,060 million in H1FY21, as compared to CAD 946 million in the previous corresponding period (pcp) supported by higher cash from the operation of CAD 5,476 million in H1FY21, as compared to CAD 1,374 million in pcp. A higher dividend payment during the current challenging environment is a key positive. Notably, the stock carries a dividend yield of ~4.5%, which looks impressive considering the current interest rate scenario.
  • Impressive Asset base with balanced revenue mix: The company has a large, long life, low decline asset base and derives majority of the income from it, which is a key positive as it provides sustainable production and free cash flow even in a lower price environment. Moreover, the company’s revenue is scattered into four segments, which reduces the risk of dependence on one segment.

                      

                               

Source: Company Presentation

Q2FY21 Financial Highlights:

  • CNQ announced its quarterly result, wherein the company posted revenue of CAD 6,525 million, jumped from CAD 2,871 million in the previous corresponding period (pcp). The growth was supported by higher crude oil, and NGLs realized prices which stood at CAD 61.20 per bbl in Q2FY21, depicting a handsome increase of 223% compared with CAD 18.97 per bbl in pcp.
  • The quarter witnessed higher production costs, increase in Transportation, blending & feedstock expense. On the flip side, a lower interest supported the profitability.
  • The company reported net earnings of CAD 1,551 million, as compared to a net loss of CAD 310 million in pcp.

Source: Company Report

Risks: Decline in crude oil and natural prices would dampen the company’s income and profitability. Moreover, failure to implement the cost control strategies in a proper manner might weigh high on the company’s margins.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

For FY21, the company expects its total production in between 1,190 - 1,260 MBOE/ per day, reflecting a 5% growth from the previous year. Natural gas production is estimated to grow by 12% on y-o-y to 1,620 - 1,680 MMcf/day, while total liquids production is anticipated within 920 – 980 Mbbl/day in FY21. The company expects higher capital expenditure of CAD 3,205 billion for FY21, compared to CAD 2,701 billion in FY20. We have valued the stock using the Price to CF-based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like ARC Resources Ltd, Suncor Energy Inc etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 41.84 on August 06, 2021.

One-Year Technical Price Chart (as on August 06, 2021). Source: REFINITIV, Analysis by Kalkine Group

Imperial Oil Limited

Imperial Oil Limited (TSX: IMO) is one of Canada's leading integrated oil companies, which operates in upstream operations, petroleum refining operations, and the marketing of petroleum products.

Key Highlights:

  • Improved Operations: The company reported a solid increase in Refinery throughput and higher Petroleum product sales during the first half of FY21, as compared to the previous corresponding period. Notably, refinery throughput averaged 348,000 barrels/day, climbed from 330,000 barrels/day in pcp, while capacity utilization stood at 81%, up from 78% in pcp. The group also recorded a surge in its petroleum product sales, which stood at 421,000 barrels/day in H1FY21 compared to 409,000 barrels/day in pcp. The group’s performance from the Chemical segment recovered too and stood at CAD 176 million in H1FY21, significantly higher than CAD 28 million a year ago.
  • Impressive Outlook: For FY21, the company expects upstream production of 415 kboe/day, higher than 395 kboe/day in FY20, supported by improved production from Kearl oil sand mines. Total refinery utilization is expected at ~89%, up from ~80% in FY20. Refinery throughput is expected at 375 kbd in FY21, higher than 340 kbd in FY20.

Q2FY21 Financial Highlights:

  • IMO announced its quarterly result, wherein the company posted revenue of CAD 8,047 million, jumped from CAD 3,710 million in pcp. The increase was driven by improved realization prices per barrel coupled with a surge in gross production.
  • Purchases of crude oil & products costs and production & manufacturing expenses stood higher at CAD 4,867 million and CAD 1,569 million, respectively, as compared to CAD 2,115 million and CAD 1,273 million, respectively, in Q2FY20.
  • The group reported a net profit of CAD 366 million, as compared to a net loss of CAD 526 million in pcp.

Source: Company Report

Risks: The company’s income is directly related to the international crude prices, and a volatility in crude prices would affect the overall realization prices and would take a toll on the company’s margins and cash flows.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

Despite the current economic doldrum, the company paid dividend of CAD 323 million in H1FY21, as compared to CAD 326 million in the previous corresponding period, which suggests a stable cash flow from operations. Moreover, the stock carries a yield of ~3.1%, which looks decent considering the current interest rate environment. We have valued the stock using the Price to CF based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like Suncor Energy Inc, EOG Resources Inc etc. Considering the aforesaid facts, we give a ‘Hold’ rating on the stock at the last closing price of CAD 34.15 on August 06, 2021.

One-Year Technical Price Chart (as on August 06, 2021). Source: REFINITIV, Analysis by Kalkine Group

Boralex Inc

Boralex Inc (TSX: BLX) is an electric utility company which operates in the development, construction, and operation of renewable energy power facilities. The group controls a portfolio of electricity-producing plants that utilize wind, hydroelectric, thermal, and solar fuel sources.

Key Highlight:

  • Higher net installed capacity: The company reported a constant increase in its net installed capacity to 2,469 MW in H1FY21, reporting a ~16% CAGR growth since December 31, 2015. The growth was achieved by organic growth and through successful acquisitions. As per the management, the pipeline remains high, and the group expects strong growth in installed capacity over the next ten years.
  • Sequentially improved margins: The company managed to report improved profitability margins in Q2FY21 as compared to the previous quarter, which is a key positive. Notably, gross margin and EBITDA margin stood at 76.6% and 66.1%, respectively in Q2FY21, higher than 72.2% and 57.4% in Q1FY21. Additionally, the operating margin jumped 19.4% in Q2FY21, significantly higher than 2.8% in Q1FY21.

Q2FY21 Financial Highlights:

  • BLX announced its second quarterly result, wherein the company posted revenue of CAD 151 million, higher than CAD 124 million in the previous corresponding period (pcp). The increase was driven by improved power production of 1,323 GWh, v/s 937 GWh in Q2FY20, supported by strong momentum from the wind power stations.
  • Total costs were recorded at CAD 126 million, increased from CAD 100 million in Q2FY20. The increase was due to higher operating and higher amortization expenses.
  • The company reported a net loss of CAD 8 million, as compared to a net loss of CAD 6 million in the previous corresponding period (pcp).

Source: Company Reports

Risks: A major chunk of the revenue comes from the wind segment and hence, any adverse weather conditions would impact the company’s operations and might dampen the cash flows as well.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

With the increase demand in the renewable segment due to climate control initiatives and greenhouse gas emission reduction targets, the company is expecting strong demand for renewable energy from environmentally conscious companies. Notably, the recent acquisition of a majority interest across seven solar power stations in the United States (State of California), which has an installed capacity of 209 MW, would strengthen the company’s position. We have valued the stock using P/CF based relative valuation approach and arrived at a target price offering single-digit upside potential (in % terms). We have considered peers like Brookfield Renewable Partners LP, TransAlta Renewables Inc etc. Considering the above-mentioned facts, we give a ‘Hold’ rating on the stock at the closing price of CAD 38.36 on August 06, 2021.

One-Year Technical Price Chart (as on August 06, 2021). Source: REFINITIV, Analysis by Kalkine Group 

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


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