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Summary

  • Average annual growth of about 29% in dividends.
  • Solid growth in operating cash flows over the last year.
  • The growth projects will support the growth in cash flows and dividends.

Canadian Natural Resources (NYSE:CNQ) is an independent energy company engaged in the exploration, acquisition, development, production, marketing and sale of crude oil, natural gas and natural gas liquids (NGLS). The company has core operations in the resource rich sites of Canada, United Kingdom and Off-shore Africa. Over the last two years, the company has performed exceptionally well and increased its revenues as well as operating income substantially. However, we believe there are opportunities in front of the company to further enhance its position in the industry. In this article, we will analyze the dividends, dividend growth and future growth prospects of the company.

Dividend Growth

CNQ has a strong history of increasing dividend on consistent basis - the most recent increase in the quarterly dividends came in the last quarter when the company increased the dividend from CAD$ 0.200 ($0.18) to CAD$ 0.225 ($0.20) per share. The company has grown its dividends at an average annual growth rate of about 29% since 2009. Currently, the company pays an annual dividend of $0.82 per share, yielding 2.1%. During the last year, the company distributed cash dividends of $0.47 billion. Moreover, the company repurchased shares worth $290 million, which means the total cash returned to shareholders equaled $0.76 billion in the last year.

The sustainability of dividends is analyzed through payout ratio. The payout ratio based on free cash flows is relatively high for CNQ amongst its peers, given in the table below. The total dividends paid over the last year stood at $0.47 billion, and free cash flows for the same period were $0.18 billion, which puts the payout ratio of CNQ at around 261%. The high payout ratio is due to the increased capital spending mainly in the midstream projects over the last year. The payout ratio based on earnings, however, is close to 26%.

CNQ has increased the capital expenditures by 15% in the last year. Moreover, the company also increased the capital guidance for 2014 to approximately $7.75-8.14 billion. This increased capital spending will not hinder the dividend distribution in the coming quarters due to the increased production resulting from expanded reserves obtained over the last year, with a total reserve replacement ratio of 149%. Despite a high payout ratio, CNQ has been able to grow its dividends at an impressive rate. Over the last five years, the company has grown dividends at a higher rate than its industry peers such as Conoco Phillips (NYSE:COP) and Occidental Petroleum Corporation (NYSE:OXY).

Dividend per Share

Average Growth in five years

Dividends Paid (Billions)

Free cash flows (Billions)

Payout Ratio

CNQ

$0.82

29%

$0.47

$0.18

261%

Conoco Philips

$3.36

16%

$3.34

$0.55

607%

Occidental

$2.56

18%

$1.55

$3.89

40%

Source: Morningstar and SEC Filings

According to the table, CNQ has the highest dividend growth rate compared to the peers mentioned above. Also, the increased capital spending in the oil sands expansion projects and increasing crude oil demand will boost the free cash flows, which will eventually bring the payout ratio to an optimum level with more room to grow its dividends in the future.

Future Prospects

With a balanced set of assets, CNQ was able to allocate its capital to the projects which will yield highest returns to its shareholders. Moreover, the company is focusing on longer life assets that will be less capital intensive, increase the production and significantly grow free cash flows of the company. Also, the energy sector demands heavy allotment of capital to replace its depleting reserves. Therefore, CNQ achieved 149% reserve replacement with a total proved reserve life index of approximately 29 years. The company's strong financial background and largest reserve base amongst the peers will provide it adequate momentum to perform better in the coming years.

The company is focusing on developing reserves and expanding its operations through different growth projects. A few of these growth projects are given below:

  • The company has successfully completed the expansion of its Septimus plant, increasing its operating capacity to 12,200 barrels per day of liquids production and 125 MMcf per day of natural gas production.
  • Moreover, the completion of Pelican Lake facility has alleviated the production constraints of the company and added approximately 27% more in output compared to the previous year.
  • The company also strengthened its roots in oil sands or bitumen sands by the construction of Kirby South Oil Sand project. This project is expected to generate approximately 40,000 barrels per day by the end of 2014. The company also plans to expand this project to an output of 510,000 barrels per day over the next 15 years.

Conclusion

The recovering global economy will continue to support the demand and oil prices, which should result in increased production from oil and gas companies. The cash flows of the company have shown solid growth - CNQ reported $1.4 billion more in cash flows from operations compared to the previous year. The capital projects have started to bring in cash flows - the growth in operating cash flows is a proof of the company's strength. We believe the growth in cash flows will continue, which will support the expected growth in the dividends for the company.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.

Source: Is Canadian Natural Resources A Good Dividend Pick?