Header Menu: Top-Right


Commodity Pricing

‘Gold medal’ in cash generation: Canadian Natural bucks industry trend and boosts spending

CALGARY — While other large oil producers have pledged not to boost spending this year, Canadian Natural Resources Ltd. raised its capital budget by $275 million on Thursday following improved outlook for both oil and natural gas prices.

The move sets Canadian Natural, the country’s largest oil and gas producer, apart from other Calgary energy companies that have vowed to hold their capital spending steady regardless of how high oil and gas prices rise this year.

Competitors Suncor Energy Inc. and Cenovus Energy Inc., both announced their quarterly results last week, but resisted the urge to increase their capital budgets for the year despite swinging to profit. Cenovus CEO Alex Pourbaix said in May that the pandemic induced oil price crash of 2020 was a “near death experience” for the oil industry and vowed not to spend money to grow production until new Canadian Natural is bucking that trend, though the company’s president says it’s a relatively small amount of new money being spent.

“In general, I think our shareholders are supportive. It’s a small amount on a relative scale,” Canadian Natural president Tim McKay said in an interview with the Financial Post when asked about the increased spending, following the company’s quarterly earnings release Thursday.

Buoyed by higher oil and gas prices, the company now plans to spend roughly $3.5 billion in 2021. That additional $275 million spending will be divided between $110 million in the oilsands, $120 million to drill an additional 78 wells and $45 million to clean up an additional 800 older oil and gas wells this year.

Commodity prices have jumped dramatically over the course of 2021 as economies around the world reopen, even as COVID-19 cases surge. On Thursday, the West Texas Intermediate benchmark oil price rose roughly 1.4 per cent, to US$69.09 per barrel while the NYMEX natural gas benchmark traded at US$4.16 per thousand British thermal units.

“We’re one of the few companies that raised their dividend last year then held it,” McKay said, noting that he doesn’t expect investor pushback against the company’s new spending plans.

Investors want to ensure that oil and gas producers don’t overspend to the point where they need to cut dividends or cut share buyback programs “or do those radical things.”

If oil prices average US$66 per barrel through 2021, Canadian Natural expects to generate between $7.2 billion and $7.7 billion in cash flow in excess of expenses, after dividends, this year. The company plans to buy up to 11 million of its own shares each quarter.

“Gold medal cash generation bests the field,” Stifel FirstEnergy analyst Robert Fitzmartyn wrote in a research note Thursday, in which he increased his price target on the company to $65 per share.

Canadian Natural shares traded up roughly 1 per cent, or 28 cents each, to $40.74 on the Toronto Stock Exchange on Thursday, while the S&P/TSX Capped Energy Index rose roughly 1.5 per cent to $121.86.

Other analysts have similarly upped their target prices on CNRL, and also on other Canadian oil and gas producers, following the uptick in commodity prices and better-than-expected profitability outlooks.

National Bank Financial analyst Travis Wood said in a note CNRL is the “king of free cash flow.”

“Our Canadian Natural investment thesis remains premised on the company’s high torque to oil prices and is further supported by an industry-leading full-cycle cost structure, a diversified asset base, a deep inventory of long-life low decline assets and a solid track record of accretive M&A transactions,” Wood wrote, adding the company was still trading at cash flow multiples below its three-year average.

The company has benefited from large increases in commodity prices for both crude and natural gas, with quarterly revenues jumping 127 per cent in the quarter to $6.5 billion, up from $2.9 billion in the second quarter of 2020.

The Calgary-based oil and gas producer also posted its fourth consecutive profitable quarter after the dramatic collapse in crude oil prices at the beginning of the pandemic in early 2020. In the second quarter, CNRL recorded $1.5 billion in net earnings in the second quarter compared with a net loss of $310 million in the second quarter of 2020.

Source: Financial Post | This text was excerpted from the media outlet cited on August 6, 2021 and is provided to Noia members for information purposes only. Any opinion expressed therein is neither attributable to nor endorsed by Noia.