Canadian Natural Resources: The Berkshire Hathaway Of The Oil Sands

About: Canadian Natural Resources Limited (CNQ)
by: Small-Cap Detective

The best way to build wealth is to buy wonderful businesses when their shares are struggling.

Investors have given up on Albertan oil sands producers like Canadian Natural Resources Ltd.

Management has been quietly buying grade-A properties at rock bottom prices.

Several catalysts could lift shares in the coming months.

Several hedge fund managers, including George Soros, have started buying shares in this stock.

As I've said many times: The best way to build wealth is to buy wonderful businesses when their shares are struggling.

For Canadian Natural Resources Ltd (NYSE:CNQ), now is one of those times.

Shares of the Alberta oil sands producer have struggled in recent years, hurt by low oil prices, a shortage of pipeline capacity, and a hostile left-wing government. Throw in the threat of new carbon taxes, and you can see why Wall Street has thrown in the towel.

That situation, however, has left shares trading at a bargain price. And as I covered in a recent piece, some of the world’s smartest hedge funds have quietly started building positions in the industry. Investors, as crazy as it might sound, have good reason to be bullish on CNRL. Here’s why...

One Top Dividend Stock for the Next 10 Years

The mood among oil sands executives has gotten so bad, their wives have started hiding the hunting rifles.

Last month, shares of Devon Energy Corp. (NYSE:DVN) popped after management announced they would sell their assets in the region and leave Canada. The news follows a long list of industry players that have bailed on the Great White North, as investors seek better returns elsewhere.

CNRL, however, sees an opportunity. In September, the company acquired the Joslyn oil sands project from Suncor Energy (SU) and Total S.A. (TOT) in a C$225.0 million deal. The purchase follows several other deals in recent years, including several properties from Cenovus Energy Inc. (NYSE:CVE), Marathon Oil Corporation (NYSE:MRO) and Royal Dutch Shell (NYSE:RDS.A) (NYSE:RDS.B).

These acquisitions could turn out to be absolute bargains in hindsight. International oil companies, usually with few buyers to turn to, have started pawning off grade-A assets at rock bottom prices. In these deals, CNRL can purchase projects at prices 25% to 50% cheaper per flowing barrel than building a new property from scratch. They’ve become the Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) of the oil sands, providing emergency liquidity for any company that needs it - but only at the price they demand.

CNRL also has a bigger incentive to make these deals work. Unlike their Big Oil rivals, the company can’t turn to a massive energy empire of properties elsewhere. The company can also earn better returns through their local relationships. CNRL also has a lot more experience operating in the region. That gives them a much better chance of turning a profit than an international oil giant that sees Alberta as a satellite office.

Several catalysts could put the industry back into Wall Street’s good books.

Last month, Alberta Premier Rachel Notley leased 4,400 railcars from Canadian National Railway (NYSE:CNI) and Canadian Pacific Railway (NYSE:CP). The province plans to use these assets to begin shipping oil sands crude to international markets.

Longer term, new pipelines should offer additional export avenues. Protests have held up high profile projects, like the TransCanada Inc. (NYSE:TRP) Keystone XL pipeline. But the industry has found success by expanding existing routes, rather than putting new pipe under the ground.

Enbridge Inc. (NYSE:ENB), for instance, is nearing completion of its Line 3 expansion. Once completed, the project will add over 300,000 barrels per day of shipping capacity - badly needed relief for the energy industry. Analysts also see additional export room coming from the company’s Alberta Clipper project.

These measures, in addition to production cuts ordered by the province, have already started the supply glut at local energy terminals. Last December, Western Canadian Select, the benchmark oil price for the Alberta oil sands, traded for as low as $12.50 a barrel. Since then, prices have more than tripled to $45.00 per barrel. New export capacity should reduce the discount for Canadian crude in the future, providing a big boost to producer profit margins.

Investors, meanwhile, will get well paid while they wait.

Over the past decade, management has boosted the company’s distribution at a 22% compounded annual clip. Executives have also spent billions on share repurchases over the same period.

Chart Data by YCharts

These efforts have turned CNRL into a cash machine. Today, shares pay a quarterly distribution of $0.34 a piece. If you include stock buybacks into your calculations, this stock pays a total shareholder yield of nearly 7%. That represents one of the best upfront payouts you can find in the energy industry today.

Hedge Funds Buying Canadian Natural Resources

I’m not the only one bullish on CNRL.

Last quarter, billionaire George Soros purchased a 200,000 share stake in the business. Other hedge fund managers, including Steve Cohen and Jean-Marie Eveillard have also quietly purchased massive positions in the stock.

What do all of these investors see in CNRL. I’d say it means one thing: The oil sands represent one of the biggest bargains in the investment world today. CNRL is quietly buying up these wonderful assets at rock bottom prices. If anything goes right here, investors could make a fortune.

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.