Canadian Natural Resources: Surprisingly Good Q4 Results, Good Long-Term Dividend Candidate
Summary
- Canadian Natural Resources was one of the few companies that saw its financial performance improve year-over-year.
- The biggest reason for this is that the narrowing differential between WCS and WTI actually resulted in WCS trading higher this year than last.
- The company managed to increase its production significantly as a result of the acquisition of Devon Energy Canada.
- The improvement in free cash flow allowed it to ramp up its dividend and it now boasts more than a 7% yield.
- The company could be a good long-term dividend candidate if you can stomach the likely volatility over the next year or so.
- Looking for more stock ideas like this one? Get them exclusively at Energy Profits in Dividends. Get started today »
On Thursday, March 5, 2020, Canadian oil and gas giant Canadian Natural Resources (NYSE:CNQ) announced its fourth quarter 2019 earnings results. At first glance, these results were mixed as the company missed the expectations of its analysts in terms of bottom-line earnings but did beat their estimates on the top-line. A closer look at the actual results though shows that there was certainly a lot to like here as the company delivered record free cash flow along with some production growth. With that said though, the company was clearly affected by the weak macroeconomic conditions affecting the oil market just like all other companies in the industry. Despite the failure of the OPEC+ talks, it may be a good time to start buying high-quality oil companies like Canadian Natural Resources.
As my long-time readers are no doubt well aware, it is my usual practice to share the highlights from a company's earnings report before delving into an analysis of its results. This is because these highlights provide a background for the remainder of the article as well as serve as a framework for the resultant analysis. Therefore, here are the highlights from Canadian Natural Resources' fourth quarter 2019 earnings results:
- Canadian Natural Resources brought in total revenues of C$5.901 billion in the fourth quarter of 2019. This represents a substantial 59.40% increase over the C$3.702 billion that the company brought in during the prior-year quarter.
- The company reported an operating income of C$5.079 billion in the most recent quarter. This compares quite favorably to the C$4.601 billion that the company reported in the prior-year quarter.
- Canadian Natural Resources reported average total production of 1.060 million barrels of oil equivalents per day in the current quarter. This represents a 5.16% increase over the 1.008 million barrels of oil equivalents per day that the company averaged in the equivalent period of last year.
- The company reported a free cash flow of C$1.482 billion in the reporting quarter. This was a record for the company and a 592.52% increase over the C$214 million that it had a year ago.
- Canadian Natural Resources reported a net income of C$597 million in the fourth quarter of 2019. This compares very favorably to the C$776 million net loss that the company reported in the fourth quarter of 2018.
These results were certainly not what we have come to expect from oil and gas companies lately. In particular, nearly all of the ones that have reported have seen a marked decrease in their financial performance year-over-year but Canadian Natural Resources actually saw a marked improvement. It is even more interesting that it was able to deliver this improved performance despite the fact that Brent crude prices were on average lower than during the prior-year quarter, as shown here:
Source: Canadian Natural Resources
One of the reasons for this has to do with the differential between Western Canada Select crude oil and West Texas Intermediate crude oil. As you may recall, the price difference between the two types of oil nearly reached an all-time high last year as high production and lack of takeaway capacity caused storage facilities in Alberta to overflow. I discussed this in an article on fellow oil sands producer Suncor Energy (SU). In response, the government of Alberta forced every energy company to reduce its production in an attempt to get its price up. This worked and the price difference between the two types of crude oil narrowed. This actually resulted in the price of Western Canada Select crude oil actually being higher during the fourth quarter of this year than it was during the year-ago quarter. When we consider that 41% of the company's production is in the oil sands, we can see how the impact of the higher price for this type of oil would benefit Canadian Natural Resources.
Unfortunately, though, the remainder of the company's production is sold under either Brent or West Texas Intermediate-based pricing and we can see above that these prices were both lower than in the comparable period of last year. This offset some of the impact from the higher prices for oil sands oil. It should be easy to see why this would be the case. After all, if the company receives less money for each unit of product that it sells then all else being equal it will end up bringing in less total money.
Naturally, all else is rarely equal when it comes to energy companies. In this case, Canadian Natural Resources continued to execute on its growth ambitions and managed to grow its production fairly significantly compared to the same quarter of last year. The majority of the production growth came from the company's North American operations outside of the oil sands. This business unit produced an average of 405,970 barrels of crude oil and natural gas liquids per day, a 16% increase over the 343,054 barrels per day that it averaged in the year-ago quarter. This was a record level for this part of the company's operations. One of the most significant reasons for this is that Canadian Natural Resources acquired substantially all of Devon Energy's (DVN) Canadian operations back in June, which gave it a portfolio of producing thermal and heavy crude assets. This naturally boosted the company's production year-over-year because it did not own any of these assets in the year-ago quarter. In addition, the company added more pads to its operations at Kirby North and Primrose. The company did experience the natural production declines that come with the territory at some of its other North American fields, but these new assets were more than able to offset this as well as the lower production in the oil sands that were caused by Alberta's mandatory production cuts.
One of the best, if not the only real positive, effect of the recent decline in energy prices is that now even large energy companies like Canadian Natural Resources boast very attractive dividend yields. This company's yield is, in fact, even better than the 5.16% listed on the quote page because the Board of Directors recently voted to increase it to C$0.425 per share quarterly (C$1.70 per share annually), a 13% increase over the previous level. This would give the company a very attractive 7.88% yield at the current share price. As is always the case though, it is critical that we make sure that the company can actually afford this dividend as we do not want to be the victims of a dividend cut. In the case of a company like this, the best way to do that is to look at the free cash flow, which is the amount of cash leftover from the company's ordinary operations after it pays all of its bills and makes any necessary capital expenditures. As noted in the highlights, Canadian Natural Resources had a free cash flow of C$1.482 billion in the fourth quarter. As of December 31, 2019, the company had 1,186,857,000 common shares issued and outstanding, so this dividend would cost the company approximately C$504 million. Thus, if it can maintain its free cash flow, the company should be able to comfortably afford this dividend. With the continued decline in oil prices though, it will undoubtedly see its free cash flow decline going forward.
In conclusion, this was a very solid report for Canadian Natural Resources that certainly differed from what many of its peers posted. The next year though could prove to be quite challenging for the company as the recent fall in oil prices will certainly test its ability to profitably produce in many areas in which it operates. Unfortunately, it does not look like energy prices will be moving upward anytime soon, which the company sorely needs. It does appear to have the financial strength to weather the current climate though so could be an interesting long-term dividend play.
At Energy Profits in Dividends, we seek to generate a 7%+ income yield by investing in a portfolio of energy stocks while minimizing our risk of principal loss. By subscribing, you will get access to our best ideas earlier than they are released to the general public (and many of them are not released at all) as well as far more in-depth research than we make available to everybody. We are currently offering a two-week free trial for the service, so check us out!
This article was written by
Traditionally, we have not always responded to comments but in order to improve the quality of our research, comments will be reviewed and we will respond to issues regarding errors or omissions. This does not include our premium service, "Energy Profits In Dividends" which is available from the Seeking Alpha Marketplace. This service does include detailed discussions with our team both on the reports themselves and in a private forum.
Analyst’s 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
Recommended For You
Comments (11)
