On Jun 28, 2013, we upgraded independent oil and gas explorer
Canadian Natural Resources Ltd.
) to Neutral from Underperform. Our new investment thesis is
supported by a Zacks Rank #3 (Hold).
ARC RESOURCES (AETUF): Get Free Report
CDN NTRL RSRCS (CNQ): Free Stock Analysis
CDN OIL SANDS (COSWF): Get Free Report
ENERPLUS CORP (ERF): Free Stock Analysis
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Why the Upgrade?
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 uncertainties in the sector. Other positives for CNQ
include its active hedging policy, competitive cost structure,
strong balance sheet and robust free cash flow.
Calgary, Alberta-based CNQ has a broad portfolio of low-risk
exploration and development projects that yield long-term volume
growth at above-average rates. In particular, the company's
strong, balanced and diverse asset portfolio, combined with its
focus on low cost operations, allowed it to generate substantial
free cash flow even in a low price environment. Additionally,
with most of CNQ's production generated from North America, it
escapes the political risk associated with operations in unstable
Additionally, CNQ displays a healthy financial position,
reflected by a low debt-to-capitalization ratio of 27.7%, making
the company less susceptible to financial risk. Backed by this
strength, management has hiked dividend for 13 consecutive years
with a compounded annual growth rate of 21%.
However, we think that these factors are adequately reflected in
the present valuation, leaving little room for meaningful upside
from current levels. CNQ's exposure to the inherently cyclical
and volatile exploration and production (E&P) sector offsets
these strengths and remains a key area of concern, in our view.
The stock has also been held back by operational challenges,
continued volatility in natural gas prices and a fresh round of
cost inflation in the oil sands regions.
Stocks That Warrant a Look
While we expect CNQ to perform in line with its peers and
industry levels in the coming months and advice investors to wait
for a better entry point before accumulating units, one can look
ARC Resources Ltd.
Canadian Oil Sands Ltd.
) as good buying opportunities. These Canadian upstream energy
operators - sporting a Zacks Rank #1 (Strong Buy) - have solid
secular growth stories with potential to rise significantly from