EUR 850.00 For Business Accounts Only

Morningstar | Pipeline Expansions Hold the Key to Canadian Natural's Success

Canadian Natural Resources is an independent energy company engaged in upstream operations coupled with the ownership of midstream pipeline assets. The company focuses on the acquisition, development, production, marketing, and sale of crude oil, natural gas, and natural gas liquids. Canadian Natural operates in western Canada, the U.K. sector of the North Sea, and offshore Africa.Canadian Natural's ownership of midstream pipeline assets allows it to control the transport of a significant portion of its own production and lowers its transportation expenses and overall cost structure. Thus, its cost structure compares favorably with peers. Even with a low cost structure, though, Canadian Natural faces an uphill struggle coping with lower oil prices. Depressed realized prices due to lack of market access have forced capital spending cuts, stalling the growth potential of its oil sands assets. Proposed expansion projects still require high levels of capital spending, and growth is at a standstill. We don't expect production from any major growth projects before Kirby North comes on line in early 2020. With growth at a standstill, Canadian Natural has shifted its focus to returning capital to shareholders in the form of dividends. Its yield around 4% is at the head of the class among oil sands producers. On the other hand, Canadian Natural scored a bargain with its purchase of a 70% working interest in the Athabasca Oil Sands Project. The company acquired the assets at approximately CAD 60,000 per flowing barrel, almost 25% less than it would cost to undertake a large-scale Horizon expansion project. We expect cash break-even prices (including a 10% internal rate of return) on the acquired assets to be below $55/barrel West Texas Intermediate, including the initial capital outlay. With the recent sell-off in equities, we now see upside in the stock. However, we caution investors that the stock won't appreciate to our estimate until the pipelines are built.