Canadian Natural Resources Ltd

Canadian Natural Resources (TSX: CNQ) is one of the largest oil and natural gas producing company across western Canada, complemented by operations in the North Sea and Offshore Africa. CNQ’s portfolio includes light and medium oil, heavy oil, bitumen, synthetic oil, natural gas liquids, and natural gas. 

Key Highlights:

• An income Play: The company reported strong dividend growth over the years, which indicates robust cash flows and operational resilience. The company reported a ~20% CAGR growth rate in dividend payments since its inception, which is a key positive despite business is prone to cyclicality and pricing pressure due to several macro-dynamics. At the last traded price, the stock was offering an attractive dividend yield of ~6.084%, which would attract several income investors.

Dividend History (Source: Company Reports)

• Strong Balance-sheet with Ample Liquidity: The company has a strong balance sheet with optimum retained earnings, which is a key positive. Furthermore, during Q3FY20, the company has reduced its net debt by CAD 1.1 billion. Moreover, the company has liquidity of ~CAD 4.2 billion, which seems sufficient to withstand the challenging operating environment.

• Diverse Product Portfolio: The company has a diverse product portfolio of natural gas, oil sands mining & upgrading, light crude oil & NGls and heavy crude oil. A diverse product range lowers the company’s overall risk profile during economic cycles.

Product Profile (Source: Company Presentations)

Q3FY20 Financial Highlights:

• CNQ announced its quarterly results, wherein the company posted revenue of CAD 4,504 million, as compared to CAD 6,160 million in the previous corresponding period (pcp). Meanwhile, product sales stood CAD 4,676 million, higher than CAD 2,944 million in Q2FY20.
• The company reported earnings before taxes at CAD 417 million, against CAD 1,364 million in the previous corresponding period, due to lower revenue, while a slide in the total expenses supported the profitability.
• The company reported net earnings of CAD 408 million, significantly lower than CAD 1,027 million in Q3FY19.
• Cash and cash equivalent stood at CAD 175 million, while total assets stood at CAD 73,730 million.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: A decline in the natural gas and crude oil prices are likely to hinder the realization price, and subsequently, it would weigh on the group’s financial performance.  

Valuation Methodology (Illustrative): Price to CF based

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: Due to a sluggish economic scenario coupled with weak crude oil prices, the CNQ stock corrected ~33% so far this year. However, the quarter was marked by solid operational recovery as compared to the prior quarter on account of the revival in the overall demand, which is a key positive. We believe, recovery in the overall economy is likely to support the realization prices and sales volumes in the near term. We have valued the stock using P/CF based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered peers like Suncor Energy Inc, Cenovus Energy Inc etc. Hence considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 27.94 on November 11, 2020.

CNQ Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Parex Resources Inc

Parex Resources Inc (TSX: PXT) engages in exploration, development, and production of crude oil. The company brings technology utilized in the Western Canada Sedimentary Basin to South American basins with large oil-in-place potential.

Key Highlights:

• Debt-free balance sheet: The company has a zero debt in its balance sheet, which is commendable looking at the nature of the business. Exploration and development of crude oil demand capital investments and most of the players finance it through debt component along with internal accruals. Historically the company showed strong cash flow generation, which has led to zero debt balance sheet.

• Impressive Guidance: The Management provided decent operational guidance. For FY20, PXT expects funds flow from operations at USD 275 million to USD 285 million, while expects a higher funds flow of USD 320 million to USD 340 million in FY21. The company is targeting a share buy-back program and intends to buy ~USD 165 million of shares in FY20 and ~USD 150 million in FY21. Constant buy-back of shares indicates Management’s confidence in the business, which is noteworthy.

FY20-FY21 Guidance (Source: Company Reports)

Q3FY20 Financial Highlights:

• PXT announced its quarterly results, wherein the company posted revenue of USD 134.177 million, significantly lower than USD 243.318 million in the previous corresponding period (pcp). The decline was primarily attributable to lower average daily sales of produced oil & natural gas of 44,172 boe/day, versus 52,401 boe/day in the previous corresponding period (pcp). The decline was primarily attributable to a voluntarily curtailing production due to the substantial fall in oil prices coupled with ongoing uncertainty in market conditions resulting from the COVID-19 pandemic.
• Income before income taxes stood at USD 57.918 million, declined from USD 128.942 million in Q3FY19.
• Net income and comprehensive income for the period stood at USD 27.619 million as compared to USD 57.257 million in pcp.
• The company ended the quarter with cash and cash equivalent of USD 353.257 million, while total assets stood at USD 1,548.484 million.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: The revenue of the company is correlated with the crude oil prices, and volatility in the price would affect the group’s performance.

Valuation Methodology (Illustrative): Price to CF based

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:  Due to the over-supply situation, international prices of natural gas and crude oil witnessed a significant correction during FY20, which subsequently took a toll on most of the oil and gas stocks. Hence, the stock of PXT saw a meaningful correction and plunged ~36% so far this year. We expect, with the gradual recovery of the economy along with an increase in oil demand from the industrial and manufacturing sector, the oil prices are likely to improve in the foreseeable future. We have valued the stock using Price to CF based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered peers like ARC Resources Ltd, Gibson Energy Inc etc. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 15.40 on November 11, 2020.

PXT Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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.