We have retained our Neutral recommendation on independent oil and gas explorer Canadian Natural Resources Ltd. (CNQ).
Calgary, Alberta-based Canadian Natural Resources Ltd. is engaged in the acquisition, development and exploration of crude oil and natural gas properties. It is one of the largest independent exploration and production (E&P) companies in Canada, with extensive heavy crude oil and natural gas developments.
The company’s large, diversified oil and gas asset bases, together with international exposure and a well-balanced blend of conventional and unconventional prospects, provides a buffer against sectoral uncertainties.
We appreciate Canadian Natural’s diverse asset base both geographically and in terms of product, comprising approximately 30% natural gas and 70% crude oil with the bulk of production located in North America. We believe this significantly reduces the company’s risk profile and gives its results a high level of stability.
In addition to the conventional oil and gas production assets, Canadian Natural is also a major oil sands player with several projects in the pipeline. The company, which competes with other Canadian behemoths like EnCana Corp. (ECA) and Suncor Energy Inc. (SU), achieved a significant milestone in February 2009 when it started the Horizon oil sands program.
Production of Synthetic Crude Oil (SCO) from the $8.3 billion project was approximately 90,867 barrels per day (Bbl/d) for the year ended December 31, 2010. The company expects annual production eventually ramping up to 500,000 Bbl/d by the next decade, thereby significantly augmenting Canadian Natural’s long-term production growth profile.
The Canadian oil sands, with their estimated 200 billion barrels of recoverable reserves, are the only oil resource to rival that of Saudi Arabia. The company’s estimates indicate 6-8 billion net recoverable barrels for its Horizon acreage.
However, Canadian Natural’s exposure to the inherently cyclical and volatile E&P sector offsets these strengths and remains a key area of concern, in our view. Operational challenges, continued weakness in natural gas prices and a fresh round of cost inflation in the oil sands regions have also held back the stock.
As of now, we don't see any obvious catalyst in its business that would significantly push the stock price higher. Consequently, we see Canadian Natural shares performing in line with the broader market.
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