Canadian Natural Resources May Double If Oil Recovers

| About: Canadian Natural (CNQ)
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Cost cutting measures in place to survive under low oil environment.

Excellent balance sheet and production outlook.

A dividend growth superstar with an impressive track record may soar if oil rebounds in 2016.

Canadian Natural Resources (NYSE:CNQ) is an oil and gas exploration, development and production company which has been hit very hard in 2015 as it is down -40.4% from its 2014 high. CNQ currently pays a nice 3.15% yield, but is that dividend safe with oil prices at $30? CNQ has taken the steps to ensure that it can sustain its dividend through this tough time by managing costs carefully as the management looks determined to keep its distribution alive. Guru investor George Soros seems to think CNQ is a good bet as he initiated a big position last year, but should you?

Cost cuts in place to survive under low oil environment

CNQ has been actively cutting costs as oil drops below the $30 level in order to survive and sustain its 3.15% dividend yield for its investors. CNQ lowered its 2015 capital plan to $5.4 billion from $8.6 billion. The Horizon oil sands project is still being worked on despite the low oil price environment and spending on this project can be expected to be between $4-5 billion going forward with $2 billion already spent on Horizon's expansion. The Horizon project has efficient production operations with an average operating cost of around $27 per barrel which is still profitable at $30 oil. Horizon is project that CNQ believes will be a great long term investment and that their investment during this harsh environment is actually saving them money when compared to continuing the project when oil is at the $100 level. Senior management has also cut all employee salaries by as much as 20% in order to maintain enough free cash flow to cover both the Horizon expansion as well as the current dividend which it increased in 2015 despite the collapse in oil prices. Even with cost cutting measures put in place, the outlook looks good for CNQ as production increased by 11% to around 850,000 barrels per day in Q3 2015 when compared to Q3 2014. It is clear that management is still focused on the long term while taking into consideration the short term impacts of the business.

Strong balance sheet, management dedicated to shareholders and strong track record make the yield safe

CNQ has a debt to book ratio of around 40% which is well below the 65% limit put on by lenders. Given management has implemented appropriate cost cutting measures to allow CNQ to survive through such as harsh environment it looks like CNQ could continue to sustain its yield and potentially even increase it in 2016 as oil is most likely going to rebound to the $45-50 level. Management is dedicated to shareholder returns and cut their own salaries in order to maintain the 3.15% yield. This is the kind of management you want running a company in your portfolio, CNQ increased its quarterly dividend to $0.23 per share and will continue to do so even if oil prices stay depressed for a longer period of time. The current free cash flow from operations is more than enough to cover its capital expenditures as well as covering the dividend payout.

What if oil decreases to the teens or single digits? If that happens, CNQ will most likely have to end its dividend growth and cut the yield as its peers go bankrupt and dividend cutting becomes to norm. Investors in CNQ should be prepared for the worst if oil prices do reach these lows, however I believe that oil has bottomed and we will see oil test the $50 levels by the end of 2016. CNQ will be well positioned to have a huge rebound if this happens, but for now investors who are bullish on oil can collect the 3.15% yield in the meantime.

Supporting Documents

  1. q315_interim-report.pdf

Disclosure: I/we 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.