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Morningstar | Raising Our FVE for Canadian Natural Resources; Stock Looks Undervalued

We are raising our fair value estimate for Canadian Natural Resources to $35 (CAD 46) per share from $34 (CAD 44) to reflect an increase in our near-term price realization forecasts. The stock is trading in 4-star territory, and we see 20% upside coupled with a 3.5% yield. We think that the market is overlooking the company’s ability to generate cash flow amid low Canadian commodity prices. Furthermore, we are maintaining our no-moat rating.

As a reminder, Canadian Natural 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 make progress on 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 buy back shares and reduce 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 to 1.5 times trailing EBITDA and absolute debt to CAD 15 billion. We think that the company can achieve its leverage targets by the end of 2019.

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."