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Morningstar | Raising Our FVE for Canadian Natural Resources; We See Attractive Entry Point

We are raising our fair value estimate for no-moat Canadian Natural Resources to $34 (CAD 45) per share from $33 (CAD 44) to reflect an increase in our near-term price realization forecasts. The stock is trading in 4-star territory and represents an attractive entry point for investors. We see 35% upside coupled with a best-in-class 4.1% yield.

Heavy oil represents only a third of Canadian Natural's crude production, and the firm has less exposure to the heavy oil discount than its peers. However, we think the market is placing too much emphasis on its heavy oil production and is overlooking the company’s ability to generate cash flow amid low Canadian commodity prices. Among our oil sands coverage, Canadian Natural possesses the lowest corporate cash break-evens on its upstream production, approximating $32/barrel West Texas Intermediate, while our coverage averages $42/bbl WTI.

With near-term growth opportunities limited and sufficient cash flow-generating ability, Canadian Natural has turned its sights to returning capital to its shareholders and strengthening its balance sheet. The 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 are maintaining our no-moat rating.

For a detailed look at Canadian crude and pipeline trends, please refer to our September 2017 Energy Observer, "Don't Overlook Oil Sands: Falling Costs and More Infrastructure Will Make Canadian Production Globally Competitive."