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:

• An Income Play: The company paid a consistent dividend amidst the ongoing sluggish economic scenario. Notably, the company reported a higher dividend of CAD 503 million in Q1FY21 compared to CAD 444 million a year ago. Notably, the stock carries a dividend yield of ~4.5% on an annualized basis, which looks impressive considering the current interest rate scenario.
  

• Encouraging FY21 Outlook: For FY21, the group expects a higher Natural Gas production in between 1,620 to 1,680 MMcf/day, reflecting a growth of 12% on y-o-y basis. Moreover, the company also expects its Total Liquids production within the range of 920 - 980 Mbbl/day, which is ~3% higher than FY20. The company’s consolidates production is expected at 1,190 to 1,260 MBOE/day for FY21, higher than 5% on y-o-y basis. The company expects its capital expenditure of CAD 3,205 million, which includes CAD 3 billion for Maintenance Capital and CAD 200 million for Growth Capital.

Q1FY21 Financial Highlights:

• CNQ declared its quarterly result, wherein the group reported revenue of CAD 6,608 million, surged from CAD 4,500 million in the previous corresponding period (pcp). The growth was supported by improved income from both Crude oil and NGLs and Natural gas segments.
• During the quarter, the company witnessed higher production costs, increase in Transportation, blending & feedstock expense. However, the company posted a lower interest and other financing expense, and a foreign exchange gain v/s a foreign exchange loss supported the profitability.
• The company reported net earnings of CAD 1,377 million, as compared to a net loss of CAD 1,282 million in Q1FY20.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: Volatility in crude oil and natural gas prices are likely to affect the company’s income and profitability. Moreover, failure to implement the cost control strategies in a proper manner might weigh on the company’s margins.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

Despite the sluggish economic scenario, the group reported a higher cash from operations at CAD 2,536 million in Q1FY21 compared to CAD 1,725 million in pcp. On the liquidity front, the group has a fund balance of ~CAD 5.5 billion, which seems to be sufficient to withstand the required working capital and its capital investments. Moreover, the group has low maintenance capital and has world-class long-life low decline assets (comprised ~63% of its assets), which further delivers higher operational efficiencies, as compared to its industry competitors. 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, Cenovus Energy Inc, Suncor Energy Inc etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 41.33 on July 26, 2021.

One-Year Technical Price Chart (as on July 26, 2021). Analysis by Kalkine Group

Nutrien Ltd

Nutrien Ltd (TSX: NTR) is the world’s largest provider of crop inputs and services, and it plays a critical role in helping growers around the globe increase food production in a sustainable manner.

Key Highlights:

• Upgraded Guidance: For the first half of FY21, the group expects its earnings per share (EPS) within the range of USD 2.30 to 2.50, increased from the earlier guidance of USD 2.00 to 2.20. The group expects higher earnings, supported by the strength in global fertilizer markets and strong operational results. Moreover, the management expects surge in its production of potash by one million from its earlier production guidance. Potash production is expected in between 13.3 to 13.8 million tonnes for FY21.

• Favorable macros: For FY21, the company expects its Crop Nutrient Markets to remain robust, supported by strong global demand due to favorable agriculture outlook. Encouraging Australian winter crop planting and production outlook are expected to lead to higher spending for Nutrient Markets, while within the US geography, urea and UAN prices are expected to remain elevated supported by the strong demand for the spring application season. Additionally, demand for urea across China is expected to remain positive in the rest of FY21.

Q1FY21 Financial Highlights:

• NTR announced its quarterly result, wherein the company posted sales of USD 4,658 million, climbed 11% over Q1FY20. The increase was driven by higher Retail sales coupled with an impressive performance from the Potash segment.
• Gross margin stood higher at 31% on y-o-y basis to USD 1,156 million, supported by elevated revenue and controlled freight, transportation and distribution expense, partially offset by a 6% higher cost of goods sold at USD 3,291 million.
• The period was marked by higher selling expenses, marginally lower general and administrative expenses. Adjusted EBITDA jumped 59% on y-o-y basis to USD 806 million.
• The group turned profitable and posted net earnings of USD 133 million, as compared to a net loss of USD 35 million in Q1FY20. Finance cost stood lower at USD 120 million, versus USD 133 million in the previous corresponding period.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: The demand for the company’s products are based upon the global agriculture industry and the international commodity prices. Price volatility in the commodity prices would affect the company’s realization prices and cash flows.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

In order to combat the persisting tightening in global potash market conditions, the group is adopting several cost control techniques to support its earnings. Free cash flow increased to USD 476 million in Q1FY21 compared to USD 181 million in pcp. The stock of NTR carries a dividend yield of ~2.98% on an annualized basis, which is decent considering the persisting interest rate scenario. 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 Mosaic Co, CF Industries Holdings Inc etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 74.53 on July 26, 2021.

One-Year Technical Price Chart (as on July 26, 2021). Analysis by Kalkine Group

*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.