We are maintaining our Neutral recommendation on Canadian Natural Resources Ltd. (CNQ) – a company engaged in the acquisition, development and exploitation of crude oil and natural gas properties.
The company displays an impressive portfolio of exploration and development projects, planned investment program and updated outlook. We also appreciate Canadian Natural’s diverse asset base both geographically and in terms of product, comprising approximately 35% natural gas and 65% crude oil with the bulk of production located in G8 countries.
During the second quarter of 2012, Canadian Natural performed modestly with earnings per share, excluding one-time and non-cash items, of 55 Canadian cents (54 U.S. cents) lagging our estimate of 59 U.S. cents. Quarterly revenue of C$3,826.0 million (US$3,864.2 million), however, surpassed our projection of US$3,504.0 million.
The quarterly results reflect robust crude oil and natural gas liquids sales volumes in North America, partially negated by poor performing North Sea region and steeper production costs.
For the third quarter, the company is guiding toward production of 451,000–480,000 barrels per day (Bbl/d) of liquids and 1,170–1,190 million cubic feet per day (MMcf/d) of natural gas. For 2012, the company guided toward production of 454,000–474,000 Bbl/d of liquids and 1,220–1,235 MMcf/d of natural gas. We believe that extensive drilling activities, development works at Primrose unit and advanced technological applications will aid the company in accomplishing the set goal.
Calgary, Alberta-based Canadian Natural’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 the company’s production generated from North America, Canadian Natural escapes the political risk associated with operations in unstable countries.
However, the unstable macro environment and unpredictable operational hazards pose as overhangs for the stock. The company’s results for the coming quarters are directly exposed to oil and gas prices, which are inherently volatile and subject to complex market forces.
A significant portion of Canadian Natural’s production/reserves growth in the last few years has come from property acquisitions, exposing it to acquisition-related risks. The company may find it difficult to complete accretive transactions in the future, which could negatively impact its growth rate.
Considering these factors, we recommend investors to hold on to the stock, until major catalysts push it higher. Canadian Natural, like the other domestic energy company Encana Corp. (ECA), currently retains a Zacks #3 Rank that translates into a short-term Hold rating.
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