EUR 850.00 For Business Accounts Only

Morningstar | Canadian Natural Focuses on Share Buybacks and Debt Reduction; Stock Looks Undervalued

No-moat Canadian Natural Resources reported third-quarter production of 1.06 million barrels of oil equivalent per day, which was in line with our expectations. Production was up 1% from second-quarter levels, driven by the completion of the Horizon Phase 3 expansion. The company continues to progress its 32 mbbl/d Primrose and 40 mbbl/d Kirby North oil sands growth projects, with first oil expected in late 2019. The initial target for Kirby North was 2020. Outside of these projects, future growth looks uncertain for Canada’s largest producer.

The company returned capital to its shareholders during the third quarter through its best-in-class dividend, which yields 3.5%, and CAD 433 million in share buybacks. Subsequent to the quarter-end, Canadian Natural repurchased an additional CAD 267 million of its shares for cancellation, bringing its year-to-date total to CAD 1.1 billion. With limited growth opportunities, Canadian Natural’s board announced a policy to continue to buyback shares and reduce the company’s debt. On an annual basis, Canadian Natural will allocate 50% of its residual free cash flow, which is free cash flow after budgeted capital expenditures and dividends, to share repurchases and the remaining 50% to reducing debt. The company intends to reduce its leverage levels to 1.5 times trailing EBITDA and absolute debt to CAD 15 billion.

We intend to incorporate Canadian Natural's third-quarter results into our model shortly, but for now, we are maintaining our $34 (CAD 44) fair value estimate. The stock was up almost 5% on the earnings release and is now trading near $29 (CAD 38). We continue to see upside in the 4-star stock.

For a detailed look at Canadian crude and pipeline trends, please refer to our September Energy Observer, "Don't Overlook Oil Sands: Falling Costs and More Infrastructure Will Make Canadian Production Globally Competitive."