Canadian Natural Resource (NYSE:CNQ) is the largest oil and natural gas company in Canada involved in exploration and production of oil and natural gas. The company operates in a climate of uncertainty where future streams of revenue are contingent upon exploration and productive efficiency. Despite the aforementioned constraints, CNQ has been able to report impressive earnings and a competitive return to its investors.
The company reported a decline in net earnings of 28%, with a total income of $1.9 billion in 2012, despite an increase in revenue. A fall in net earnings can be attributed to the fall in oil prices leading to shrinkage in profit margin. Amortization, depletion and depreciation charges showed a significant increase of 68% compared with last year. Both a decline in oil prices and operating expenses help explain the decline in earnings. The company increased the amount of dividends paid out to its shareholders. Cash flows from operating activities too declined for reasons mentioned above.
The financials of the company were subject to external shocks as the energy sector recovers from the recent economic downturn. The company has a dividend yield of 1.68%, on annual dividends of $0.50 per share. The company's ROE of 8% is less than the industry average of 9.42%.
Reserve Base and Future performance
The decline in earnings of the Canadian giant should not be viewed with skepticism. The company has one of the largest assets bases of oil and natural gas reserves in western Canada, North America, Africa and Middle East. The company reviews its probable and probable-plus-proved reserves via independent qualified reserves evaluators with the total reserves amounting to 7,886 million barrels by the end 2012. The company announced to increase its reserves by 9% in 2013, which will be a substantial increase taking into account the current conditions of the market. On the balance sheet, the company's exploration and evaluation assets amounted to $2,611 million, a marked increase of 5.5%.
The basis of the business model is balance; a balance between resource development, dividends and share repurchase. For the coming year, the company plans to use its asset reserves in sustainable manner as per its mission statement. The company shows a historical trend of increasing production and reserves and plans to continue with this trend. Capital allocation to the natural gas component has been reduced by 9%. However, the decrease in production will be offset by more efficient extracting techniques. Currently, light crude oil and NGLs consist of 500 operated light pools, and management has decided to increase production in this area to up to 125 million cubic feet per day (12,200 barrels). Also, primary heavy crude oil production volume is targeted to increase by 13% in the current year. Thus, the overall impact of the aforementioned changes will lead to an increase in production translated into higher earnings. The focus is to maximize return on investments for the stakeholders in the company.
Like any other oil and gas producing corporation, the company is subject to a great deal of volatility in earnings imposed by market risks. The volatility in earnings comes from fluctuations in oil and gas prices along with the reserve yields. Exploration and the use of more productive technology affect the earnings in a positive manner and vice versa. Canadian Natural Resources is subject to geopolitical risks, market risks and exchange rate risks. Credit risk arising from non-payment and failure to make physical sale of contract poses a major threat. The company has invested in high investment portfolio, derivative securities and currency swaps to hedge risks. Nonetheless, unexpected events can have a detrimental effect on future earnings.
After analyzing the potential and possible threats in CNQ for an investor, I would suggest a buy recommendation for the stock. The stock will appreciate in value due to an expected increase in oil prices driven by an increased demand for energy fuels by households as well as businesses. For an investor seeking stable returns the stock would be ideal since the company has consistently paid dividends. Viewing the stock from a growth perspective, CNQ is expected to increase in value due to the projects undertaken by management and favorable macroeconomic factors in the near future.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.