CNR's Overruns Could Negatively Impact Other Oil Sands Players

Canadian Natural Resources Ltd.’s (CNQ) fourth quarter update for its Horizon Oil Sands Project suggested costs for Phase 1 may be over budget by nearly C$2-billion. While another overrun may come as little surprise to some given that the first one was 5-12% above the original budget of C$6.8-billion, and the second and third increases were in the ranges of 8-14% and 25-28%, respectively. Blackmont Capital’s Menno Hulshof said this new overrun was nonetheless larger than expected. This time, however, extreme cold and disappointing labor productivity were to blame, the analyst told clients in a note.

However, the third quarter start date remains in place, although the company did indicate that several “non-critical path” projects experienced minor glitches.

Mr. Hulshof rates CNQ a “hold” with a C$74 price target.

Desjardins Securities analyst Adam Zive, who has a “sell” rating and C$59 price target on the shares, said this “meaningful overrun” is consistent with his expectations for further overruns going forward. In a note he told clients:

While the Street expects capital cost overruns in the oil sands, we believe that expectations still remain unrealistic regarding NAV accretion from the Horizon project. Additionally, the company has the highest exposure of the large capitalization Canadian O&G equities to changes to conventional oil royalties.

He also added that CNQ’s valuation remains stretched.

Mr. Zive also pointed out that CNQ’s announcement may have negative implications for other sell-rated oil sands players such as UTS Energy Corp. [UTS/TSX] and Synenco Energy Inc. [SYN/TSX], as well as large cap names with exposure to the sector like Petro-Canada (PCZ), which is rated “hold.”

The analyst prefers names with in-situ oil sands assets, and his top pick among those companies is Oilsands Quest Inc. (BQI).

Comments

[OilTrader23:]

Bunch of Crap-- I love how analysts can't look beyond a 6 month timefram when evaluating "investments". We all like trading, but CNQ is the #1 company in my portfolio for long-term holding. It's solid, resources, earnings, valuation, assets. None of these are mentioned in this article. I have a "Strong Long Term Buy" rating on this, with a Jan 1, 2009 price target of $103.

2008 Feb 27 04:45 PM

[traderstraffic:]

Oiltrader is right on, count me in on that hand. And will raise you 25.

2008 May 18 01:33 PM