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I am bullish on the stock. (See Canadian Natural stock charts on TipRanks)
Why Now?
The argument really is twofold. First off all, we’re in an environment where energy prices are surging, Canadian Crude is trading more than twice above the company’s breakeven ($30-31), and Natural Gas is also trading at nearly five times the company’s breakeven.
Commodity producers and suppliers will usually allocate capital when commodity prices are lower, and rake in profits when the prices are higher. The result is a significant uptick in balance sheet equity and net income, a proportion of which will likely get distributed to shareholders.
This leads to the second bullish argument. We’re headed into a potentially higher interest rate environment, which means that investors prefer dividend-paying stocks as opposed to pure growth stocks, who are likely to be victims of higher financing costs, and thus slower growth in income line items.
When interest rates are to move higher (anticipated some time in 2022), there are three prevalent sectors that benefit: energy, finance, and healthcare.
Canadian Natural is one of the most established dividend-paying energy stocks around, and a large influx of capital is potentially on its way.
Key Metrics
From a value standpoint, the stock is looking excellent. Canadian Natural’s forward P/E ratio is trading 24.8% below its sector, its forward price-to-book 10.6% below, and forward EV/EBITDA 37.5% below.
The producer has also managed to reduce its cost of capital by 17% since 2018, and it has a solid interest coverage ratio of 4.9. Both of these ensure that investors are rewarded with good value for money.
The stock has a forward dividend yield of 4.2%, which understates its potential because of its remaining capacity.
Canadian Natural’s current payout ratio is 28.2% below its five-year average, its dividend coverage is 35.4% better off than its sector, and finally, its cash from operations is 30.6% higher than its historical average.
Wall Street’s Take
Wall Street thinks Canadian Natural is a Strong Buy, based on 11 Buys, and one Hold assigned in the past three months.
The average Canadian Natural price target is $44.07, which implies upside potential of 15.6% over the next 12 months.
Final Word
Canadian Natural Resources is an intriguing stock at the moment. High commodity prices mean that the company is not investing heavily at the moment, but rather distributing profits to shareholders.
Disclosure: At the time of publication, Steve Gray Booyens did not have a position in any of the securities mentioned in this article.
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