Thursday, February 29, 2024

Canadian Natural Resources Limited - 2023 Earnings ($CNQ)

[Previously regarding Canadian Natural Resources Limited (CNQ).] 

An outstanding year from the titan of the Canadian energy industry. Some key highlights from the results (dollar figures in USD):

  • CNQ achieved its target net debt level of $7.4 billion in Q4 2023 (slightly earlier than their forecast of Q1 2024). This means that they will target 100% return of free cash flow to shareholders via dividends and buybacks.
  • Capital expenditures were 4.7% lower in 2023 than in 2022, yet production of liquids was up 4.3% and total production (including natural gas) was up 4%. They averaged 974k bbl/d for the full year and 1.05 million bbl/d in Q4.
  • Out of $9.1 billion of cash from operations, $5.6 billion of capital was returned via share repurchases, dividends, and debt repayment, and $3.6 billion was spent on capex. The share count was 2.8% lower year-over year.

The current market capitalization of CNQ (at a $75 share price) is $75 billion, and the enterprise value is $82.5 billion. Cash from operations for the fourth quarter was $3.6 billion and the company spent $722 million on capital expenditures. The remaining free cash flow for the quarter was $2.9 billion, of which $450 million was used for debt repayment, $1.15 billion was used for share repurchases, and $725 million was used for share repurchases. The free cash flow yield on the enterprise value was 14% and the shareholder yield was 12% (both based on the quarter's results annualized).

This was during a quarter with an average WTI price of $78. In its latest investor presentation, CNQ says that free cash flow per share would be 40% higher at $95 WTI than at $80 WTI. Notice also on slide 8 of the presentation, CNQ management points out that oil sands mining and upgrading requires much less capital expenditure to maintain production than shale. They call this the "long life no decline advantage".

The net present value of future net revenues, before income tax, discounted at 10%, is $78 billion for proved developed producing reserves and $138 billion for total proved plus probable reserves.

This is very speculative, but if WTI did go back to $95, that implies that the shareholder yield would be 16.8%. If that happened and investors decided to value CNQ, with a 40+ year reserve life, more like a "quality compounder" (such as Marriott or Visa) at a 4.2% shareholder yield, shares would quadruple. (We have observed in the past that investors double count: low multiples when things are bad, high multiples when things are good.)

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