Canadian Natural Resources Limited

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

A Canadian-based energy independent company that explores for, develops, produces, and markets crude oil, natural gas, and natural gas liquids.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Canadian Natural Resources (CNQ) is a major player in the oil and natural gas industry, primarily focused on North America, particularly Western Canada and the North Sea and offshore Africa. The company operates across various segments, including:

North America Exploration and Production: This segment constitutes the heart of CNQ’s operations, focused on oil sands mining and upgrading, as well as conventional and unconventional crude oil and natural gas production. The core focus areas are Western Canada and the Deep Basin region where the company has significant experience in oil and gas production. They are also making investments in unconventional production and are focusing on the development of natural gas assets.
North America - Oil Sands Mining and Upgrading: CNQ is a leading producer of synthetic crude oil from oil sands mining and upgrading operations. This segment involves all activities related to extracting and processing bitumen into synthetic crude oil. CNQ operates an integrated mining operation in the North region of Alberta, Canada.
North Sea Exploration and Production: CNQ also has operations in the UK, and other parts of the North Sea producing oil and natural gas.
Offshore Africa Exploration and Production: CNQ has operations located in Côte d’Ivoire and South Africa that produce oil and natural gas.
Midstream and Refining: The company has a 50% working interest in the North West Redwater Partnership (NWRP) which processes bitumen into diesel and other refined products.

Industry Trends and Competitive Landscape: The energy industry is incredibly cyclical, and is heavily influenced by macroeconomic trends and geopolitical events, such as demand levels, supply disruptions, technological changes, and regulatory requirements, and inflation.

Macroeconomic Factors: The price of crude oil and natural gas is particularly sensitive to global economic conditions, as demand is closely linked to economic output. Higher growth rates can lead to increased demand, while recessions or economic downturns typically lessen demand. The company expects to grow and sustain strong margins, despite challenges with inflation.
Geopolitical Risks: Political instability and conflicts in oil-producing regions can disrupt supplies and sharply increase prices, increasing oil prices and volatility. This has been heightened by the recent Russian invasion of Ukraine, which has caused instability in the global markets.
Competitive Landscape: The oil and gas industry is highly competitive. Larger integrated companies such as Exxon Mobil and Chevron compete across multiple aspects of the industry, while smaller companies like CNQ focus on specific segments or geographical areas. The rise of shale oil and gas has also altered the competitive landscape, and is putting pressure on prices of crude oil, natural gas, and other petroleum products.
Focus on Sustainability and Emissions Reduction: The focus on cleaner energy has also impacted how the company operates. The company has also made commitments to become Net Zero by 2050 and reduce greenhouse gas emissions over the next decade.

What Makes CNQ Different?

Diversified Portfolio: CNQ operates across various types of oil and gas operations, across multiple geographies. This diversification helps it withstand the shock from fluctuations in a particular segment, product, or region.
Cost Discipline: CNQ is one of the most cost-efficient oil and gas companies, which means it can still achieve high profitability even if energy prices are below historical levels. In a recent earnings call, the company management mentioned they have a history of achieving high performance while also maintaining low operating costs, which gives it better flexibility during economic downturns and market volatility.
Operations Expertise: CNQ has many projects in the development stage, and so has a lot of expertise in finding and developing new oil and gas properties, as well as processing and refining those products.
Long-Life Assets: CNQ owns and operates many assets that are designed to have a long productive life, which is expected to lead to lower operating costs over time.
Large-Scale Production: CNQ has a high production capacity and, therefore, gains a big advantage from economies of scale.

Financials Analysis

The financial data here comes from CNQ’s latest annual reports and from their most recent quarterly earnings call. They are denominated in Canadian Dollars, unless specifically stated.

Revenues: The company’s revenue is primarily derived from the sales of crude oil, natural gas, and natural gas liquids. It is important to note how different regions account for different types of resources. In 2023, the company’s overall production totaled 1.28 million barrels of oil equivalent, and the average price for crude oil was $76.4 per barrel, while Natural Gas prices averaged $2.35 per Mcf. Net income was $8.233 billion, and Adjusted Net income from operations was $8.962 billion.
Profit Margins: The net income margins have been extremely volatile in the last few years. In 2023, the net profit margin was 17.1%, compared to a negative profit margin of -8.1%, in 2020. For the latest quarter, ending December 31, 2023 the margin has increased to 23.1%. The biggest factor that affected profitability is the prices that crude oil and natural gas are sold for, which are directly correlated with macro events like overall demand, geopolitical events, and more.
Cash Flow: The company is a strong cash flow generator, and is committed to return excess cash to the shareholders via dividends and share buybacks. Adjusted funds flow was $15.87 billion for 2023 and $3.714 billion in the fourth quarter of 2023. In the latest earnings call, the management said they plan on increasing the dividend going forward. Also, they plan on aggressively deleveraging the company’s balance sheet.
Capital Expenditures: Net capital expenditure was roughly $5.6 billion in 2023 and was $1.6 billion in the fourth quarter of 2023, largely focusing on core production and projects. Future capital spending includes funding to complete ongoing projects and increase production.
Debt: Long-term debt at year-end 2023 was $10.8 billion, and the debt-to-capitalization was 22%.
Shareholder Returns: The company paid a base quarterly dividend of $0.90 per share. In addition to the base dividend, shareholders are receiving supplemental dividends, given positive earnings performance. Since March 2023, the company bought back around 40.6 million shares for ~$3 billion. They have also mentioned increasing dividend payouts in the future.

Moat Rating: 3/5 - Narrow Moat CNQ exhibits a narrow moat due to its solid, though not insurmountable, competitive advantages.

Positive factors: CNQ has a diversified portfolio of assets in many different geographies and across multiple segments, which gives them some level of resilience and protects them to a certain extent against the impacts of volatile macro events and energy prices. They also have a cost structure that helps them to be a low-cost operator in the energy sector, with the operations, technology and expertise in the extraction and refinement process.
Negative factors: The pricing power of energy companies is heavily limited by commodity prices and economic factors outside of management’s control, thereby limiting the potential for moats. They are also exposed to geopolitical events and regulations that could impact their business significantly.

Legitimate Risks to the Moat & Business Resilience

Commodity Prices: Fluctuations in oil and gas prices are a major risk factor. Significant price drops can substantially hurt CNQ’s profitability. While low-cost production will help to some degree in such cases, it isn’t enough to mitigate a complete collapse of prices, as was seen during the covid market crashes.
Regulatory Uncertainty: Regulations are always evolving in all the areas in which the company operates, and so is a constant source of risk.
Environmental Issues: The long-term profitability of energy companies will hinge largely on their compliance with environmental regulations and guidelines. The energy transition to cleaner energy, although a long-term goal, is also a challenge and risk that companies have to tackle.
Operational Risks: Production delays, accidents, supply chain issues, etc, can all negatively impact the business and reduce the potential economic value.
Debt Obligations: Although CNQ’s balance sheet looks pretty strong right now, having a lot of debt means that a significant part of earnings will go towards repaying that debt, instead of reinvesting it back into the business. In addition, having a lot of debt means more risk, and the company becomes more susceptible to economic changes.

Understandability: 3/5 CNQ is a reasonably complex company and so warrants a rating of 3/5 for understandability. The company operates in a cyclical industry, so analyzing and forecasting future financials requires specialized knowledge and a deep understanding of the oil and gas industry. The company also has a lot of complex financial metrics such as “proved plus probable” reserves which is quite technical in nature and may not be easy to interpret for most investors. The business model also involves a complex interplay between geopolitics, economics and technology, making it complex to study and fully grasp for many investors.

Balance Sheet Health: 4/5 CNQ has a very healthy balance sheet with a very strong liquidity position, indicating limited risks when it comes to liabilities, and hence is rated 4/5.

Liquidity: The Company has a very strong liquidity profile with $1.653 billion in cash and cash equivalents and $13.9 billion in credit facilities.
Debt to Capitalization: The debt-to-capitalization ratio was at 22% at the end of 2023, with an average cost of debt at 5.3%. This is a fairly reasonable number, which gives the company more financial flexibility.
Asset Base: A large asset base of $75.9 billion with $18.6 billion in net debt means the company has more assets than its debts.

Recent Concerns & Management Response: The most recent earnings call revealed management commentary that reflects awareness of high operating costs and the need for capital discipline. The focus has been on managing costs and prioritizing high-return projects while increasing dividends and share buybacks. Management has also indicated its intention to reduce net debt further.

The company has not directly stated that the current share price is under or over valued, but have said they plan to maximize shareholder value through high free cash flow generation and return of that capital to shareholders.

While they had a significant write-off on the balance sheet due to the abandonment and remediation of a particular project, the management noted that this was a one-time event, and will not be recurring. The management also expressed confidence that they have a framework and methodology in place that makes such issues unlikely to reappear.

Overall, CNQ appears to have a business model that, despite challenges, is a source of value for investors.