We are maintaining our Neutral recommendation on
Canadian Natural Resources Ltd.
(
CNQ
) - one of the leading energy companies in Canada. The company is
characterized by its low-risk business model, cost-efficient
operational base and healthy financial position. However, the weak
macro backdrop and unexpected operational disruptions at various
projects keep us on the sidelines.
Canadian Natural - which competes with other domestic behemoths
like
Encana Corp.
(
ECA
) and
Suncor Energy Inc.
(
SU
) - is engaged in the acquisition, development and exploitation of
crude oil and natural gas properties. The company's core operations
are focused in western Canada, the United Kingdom sector of the
North Sea and offshore West Africa.
Calgary, Alberta-based Canadian Natural delivered a mixed
performance for the first quarter of 2012. The company missed our
earnings per share projection but was able to beat on revenues. The
quarter's results were influenced by a strong production mix and
higher realized prices for crude oil, partially offset by lower
volumes in the North Sea and Offshore Africa, and steeper
production costs.
We believe that Canadian Natural enjoys the position of being
the largest heavy oil producer in Canada with a leading land and
infrastructure position. The company - with its effective low-cost
operational base - currently holds over 8,000 drilling locations in
inventory. It also has a vast and rich undeveloped acreage in
Western Canada, where activities are expected to start in the near
future.
Looking ahead, Canadian Natural targets high production and has
invested heavily in developing various oil plays. The company
expects light oil and natural gas and liquids in Canada to grow
16%, primary heavy oil to increase 19% and thermal in situ heavy
oil to expand 8% in 2012. We believe that extensive drilling
activities, planned investment strategies and advanced
technological applications will aid the company in accomplishing
the set goal.
However, we remain skeptical as these long-term oil projects
call for large capital outlays and several years of development
before any cash flow is realized. Hence, cost and time overrun as
well as operational accidents in the ongoing projects will likely
have a negative impact on the stock's performance.
Moreover, a major portion of Canadian Natural's
production/reserves growth in the last few years has come from
property acquisitions, exposing it to acquisition-related risks. If
the company fails to complete accretive transactions on schedule in
the future, it could hamper its growth momentum.
The oil and gas prices, which are inherently volatile and
subject to complex market forces also, pose as significant threats
to the company. Realized prices could differ significantly from our
estimates, thereby affecting the company's revenues, earnings and
cash flow.
Hence, we think that there is little room for the stock to move
upside from current levels. Canadian Natural retains a Zacks #3
Rank that translates into a short-term Hold rating.
CDN NTRL RSRCS (CNQ): Free Stock Analysis
Report
ENCANA CORP (ECA): Free Stock Analysis Report
SUNCOR ENERGY (SU): Free Stock Analysis Report
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