Canadian Natural Resources Ltd. BUY

CNQ : TSX : C$32.61
Target: C$42.00

Canadian Natural is one of the largest independent crude oil and natural gas producers in the world with a diversified and balanced asset base of natural gas, heavy oil, oil sands and light oil.
All amounts in C$ unless otherwise noted.

Energy — Oil and Gas, Exploration and Production
We are raising our target price by $3 to $42  on the heels of its Q3 release due to the following:
We believe the large dividend raise demonstrates three things: a) management’s confidence that the Primrose issue is just mechanical; b) where the company is in the spending cycle on the Horizon expansion – i.e., the company sees a path to being in harvest mode and thus ever increasing free cash flow (Figure 1); and c) the benefit of long life oil sands projects.
The company is now changing its tune with respect to acquisitions. In the past management used to highlight how free cash flow would be used to make acquisitions, which would in turn create an overhang on the stock. Yesterday, however, when asked, management stated it has no need to do any acquisitions given there are no gaps in the asset base, thus giving investors greater hope of further dividend increases.
We continue to believe the current WCS differential blow out is temporary and much different than this time last year. While differentials are about as wide as they were a year ago, the difference this time is that there is a clear line of site on infrastructure improvements in less than a year’s time owing to increased coker, pipeline, and rail capacity. As such, CNQ will be the go-to stock given roughly 40% of its production is heavy oil and it lacks downstream operations, which would act as a partial offset. Additionally, it is essentially a household name for non-Canadian investors (the incremental buyer) on this theme given its market cap and liquidity.
Cheapest in the group. At 4.8x 2014E DACF, CNQ is the cheapest among the Senior E&P/Integrateds in our coverage universe, which on average are at 6.1x.


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