Keystone Approval Or Not: Canadian Natural Resources Is A Bargain

| About: Canadian Natural (CNQ)


Canadian Natural Resources has risen 15% since I highlighted it in December.

The company recently raised its dividend, saw earnings surge and is still attractively priced at these levels.

Approval of the Keystone Pipeline would significantly improve margins and earnings, and drive a larger rally in the stock.

Another poll came out today showing Americans support approval of the Keystone Pipeline, which has now been delayed by over 5 years, by a 3 to 1 margin. In addition, over 60 senators support approval. My opinion is that the president will continue to drag his feet on this matter. However, with the mid-terms approaching, a change of heart may not be out of the question.

As I penned back in December, Canadian Natural Resources (NYSE:CNQ) would be a big, if not the biggest, winner if the pipeline was approved. Regardless the shares are doing just fine while the decision process on this "political football" moves as slow as molasses in the winter time.

Since the article, the shares have moved from $32 a share to over $37 a share. This rise has been driven by the company announcing a 12.5% increase in its dividend payout this week. The company has now tripled its payouts since 2010, and the shares will now yield a respectable 2% plus dividend.

In addition, recent earnings improved 50% Y/Y owing to increased liquid and natural gas production. Cash flow from operations came in at nearly $7.5 billion for the year, nearly $7 per common share. Nearly all of cash flow is going to capital expenditures to expand production. However, the company hopes to grow free cash flow by over 45% per year from 2013 to 2020.

The 14 analysts that cover the shares have a $43 a share median price target on CNQ, ~15% above its current price. Earnings should just jump better than 30% in FY2014 on back of a ~15% increase in revenues. The stock has a five year projected PEG of under 1 (.65). CNQ sells for just over 12x forward earnings and under 5x operating cash flow. The shares are still attractively valued at these levels.

However, if by some miracle the pipeline is approved by the end of the year, the stock could truly rally. Almost 50% of the company's current oil production is Canadian heavy crude. This crude, because of a lack of economical transportation options (i.e., pipelines), is "trapped." It currently trades at a ~$30 to ~$40 a barrel discount relative to WTI (West Texas Intermediate), which is the U.S. benchmark. Obviously, a pipeline to carry this heavy crude would have a significantly positive impact on margins and earnings.

In conclusion, Canadian Natural Resources is a relative bargain given conditions in the current environment. Keystone approval would be an event that could significantly "juice" the shares should it occur.

Disclosure: I am long CNQ. 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.