By: Ahmed Ishtiaq
Canadian Natural Resources Ltd. (NYSE:CNQ) is the second largest independent natural gas producer in Canada. It has assets in North America, the North Sea and Offshore Africa. CNRL has a leading land position in western Canada, in addition to a diverse portfolio of other properties. CNQ's operations in West Africa and the North Sea substantially add to the company's core business of crude oil and natural gas production. CNQ's scale and infrastructure provide the company with a key competitive advantage, allowing the company to react swiftly and manage according to the situation.
Like many other energy companies, CNQ has also been affected by low natural gas prices. As a result, the company reported disappointing third quarter results. According to the company, a 57% drop in the earnings happened due to lower heavy oil and gas prices. CNQ reported net earnings of C$360 million (USD361.54 million), or $0.33 per share. At the end of the last quarter, the company reported earnings of C$753 million, or C$0.68 per share. However, the company was able to meet or exceed almost all of its production targets. CNQ evaluates the performance based on the adjusted net earnings.
There are certain adjustments that the company makes to its reported net earnings to reach at adjusted net earnings. For the third quarter, the company added C$49 million (USD49.21 million) in share-based compensation and C$22 million (USD 22.1 million) in unrealized risk management losses. In addition, the company subtracted C$136 million (USD 136.58 million) in unrealized foreign exchange gains. The last adjustment to the net earnings was a change of C$58 million (USD 58.25 million) in tax liability. Stock options of the company also provide the option of cash payment. Additionally, fair value of vested options is recorded as a liability in the balance sheet. Therefore; it is a non-cash expense until the options are exercised.
Cash flow from operations also came down for the company. CNQ generated C$1.43 billion (USD 1.436 billion) in cash flows from operations, substantially lower than C$1.75 billion it generated in the previous quarter. In addition, the company lowered its capital spending by $230 million ( USD 230.9 million) during the quarter. Overall, the company has reduced the capital spending by $910 million during the year. On the production front, the company produced 667,616 barrels of oil a day in the quarter, an increase of 9 percent from a year earlier. CNQ cut the mid-point of its full-year production guidance by 1 percent, lowering estimated production for 2012 from its Horizon upgrade in Alberta to 87,000 to 89,000 barrels a day.
The company has decided to go ahead with its C$5.7 billion (USD 5.72 billion) project to convert and refine bitumen from Alberta's oil sands. The construction on the plant will commence next year and operations will start in three years. The plant will have the capacity of 50,000 barrels a day, with the option to expand the capacity to 150,000 barrels/day. CNQ has already locked in a return for the project. The company has an agreement with the Alberta government to supply bitumen and a guarantee of 10% return. The company is at an advantage at the moment due to the decrease of activity from the competition. Currently, the companies are not focusing on expanding the oil-sands processing. As a result, the firm will be able to have better access to cheap labor.
CNQ took a hit due to the announcement of poor results for the quarter. At the moment, the stock is trading at $27.65, well off its 52 week high of $41.38. The company has a market cap of $30.16 billion and forward P/E of 11.3. Currently, the stock is trading close to its 52 week low of $25.01.
Debt to Equity
CNQ looks slightly expensive compared to its competitors based on the P/E ratio. However, the stock is trading at lower P/B and P/S ratios compared to the competition. In addition, the company has strong margins and beats almost all of its competitors. A look at the EPS growth indicates that the industry is suffering as a whole. Suncor Energy was the only participant which showed positive growth in EPS.
The company has decreased its production expectations for the coming year as well as capital spending. As a result, the short term outlook for the company is mostly bearish. In addition, slow growth in the global economy will continue to hinder growth in the energy sector. However, in the long term, the prospects are bright for Canada's second largest natural gas producer. The company is diverting its focus towards the heavy oils and reducing dependence on natural gas. Recent dip in price provides an attractive opportunity to get into this stock and make substantial profits.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: EfsInvestment is a team of analysts. This article was written by Ahmed Ishtiaq, one of our equity researchers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.