Canadian Natural Resources Limited Announces 2022 Second Quarter Results ($CNQ)

[Previously regarding Canadian Natural Resources (CNQ) (one of the Canadian oil majors along with Cenovus and Suncor): Canadian Natural Resources Limited Announces 2022 First Quarter Results, Canadian Natural Resources Limited - Q4 and FY 2021 Results and Canadian Natural Resources Limited.]

Canadian Natural Resources (CNQ) reported results last week. Highlights from the results and conference call: 

• Our second quarter financial results were very strong on the back of safe, effective, and efficient operations and a robust pricing environment, including a strong SCO premium to WTI. In Q2 net earnings were $3.5 billion and adjusted funds flow were $5.4 billion, allowing for significant allocation to shareholder returns through dividends and share buybacks, further debt repayment, and to the strategic growth opportunities, all providing long-term shareholder value. Returns to shareholders have been significant and increasing through 2022. As we have returned a total of approximately $6.4 billion to shareholders through $2.4 billion in dividends, and $4 billion through share repurchase equaling about 56 million shares year-to-date, up to an including August 3.
• A substantial portion of our unique and diverse asset base consists of long life low decline assets which have significant, low risk, high value reserves that require lower maintenance capital than most other reserves, making Canadian Natural a truly robust and resilient energy company.
• We continue to strengthen our balance sheet, having reduced net debt by approximately $1.4 billion in Q2/22, ending the quarter with approximately $12.4 billion in net debt. Returns to shareholders year-to-date in 2022 have been significant as we have returned approximately $2.4 billion through dividends and approximately $4.0 billion through share repurchases, for a total of $6.4 billion, up to and including August 3, 2022.
• Our free cash flow allocation policy is unique in that shareholder returns are not impacted by strategic growth capital or acquisitions given our current net debt position is below $15 billion, and that our free cash flow is net of dividends. Through Q3/22, we will continue to target to allocate 50% of our free cash flow to share repurchases and 50% to the balance sheet.
• Strong execution across the Company's operations year-to-date has resulted in substantial free cash flow generation driven by our top tier long life low decline assets with low maintenance capital requirements and our low cost structure. As a result, our financial position continues to strengthen, allowing for incremental returns to shareholders. Reflecting this, in August 2022, the Board of Directors approved an increase in returns to shareholders by declaring a special dividend of $1.50 per share, payable on August 31, 2022 to shareholders of record on August 23, 2022. This is a step towards the previously announced target to increase shareholder returns when net debt reaches $8 billion, which the Board of Directors see as a sustainable base level of corporate debt.
• Year-to-date up to and including August 3, 2022, the Company has returned a total approximately $6.4 billion to shareholders through approximately $2.4 billion in dividends and approximately $4.0 billion through share repurchases via the cancellation of approximately 55.9 million common shares at a weighted average price of $71.47 per share.
• Canadian Natural delivered record quarterly average natural gas production of 2,105 MMcf/d in Q2/22, increases of approximately 5% and 30% over Q1/22 and Q2/21 levels respectively. [...] As a result of the Company's diversified sales points, our natural gas production captured strong realized natural gas pricing of $7.93/Mcf in Q2/22, a 51% increase above Q1/22 levels and approximately 30% higher than the AECO benchmark price in Q2/22.
• Canadian Natural had, as at December 31, 2021, the largest reported natural gas reserves in Canada with a proved and proved plus probable basis of approximately 12.2 Tcf and 20.2 Tcf respectively.
• Canadian Natural has been a supporter of incremental pipeline projects, to ensure Canadian crude oil and natural gas can reach the world markets. It is important to have global market access to deliver the most responsible and leading ESG preferred barrels that the world needs. As per the latest public update provided by Trans Mountain Corporation on February 18, 2022, construction of the 590,000 bbl/d Trans Mountain Pipeline Expansion, on which Canadian Natural has committed 94,000 bbl/‍d, is targeted to be mechanically complete in Q4/23.

[Following figures in USD at an 0.774 exchange rate.]

The current market capitalization of CNQ (at a $52 share price) is $60 billion, and the enterprise value is $70 billion. With net earnings of $2.7 billion for the quarter, shares are trading for 5.5 times annualized earnings. The adjusted funds from operations of $4.2 billion for the quarter is an annualized AFFO/EV yield of 24%. For the year-to-date 2022, EBITDA of $8.8 billion less capex of $2.1 billion gives free cash flow of $6.7 billion, for an annualized FCF/EV yield of 19%.

CNRL proved reserves of liquids at the end of the 2021, net of royalties, were 9 billion barrels, calculated based on a $66 price for WTI. You are paying less than $8 per barrel of proved reserves of liquids at the current share price, not counting the 12 trillion cf of natural gas reserves. 

The PV-10 of proved reserves at the end of 2021, again assuming a $66 oil price and a $3.70 Henry hub natural gas price, was $65 billion at the end of 2021. With the share price decline since we posted last quarter, the enterprise value is now under 1.1x the present value of the proved reserves.

The difference between Canadian Natural Resources and our other Canadian majors (Cenovus and Suncor) is that CNRL does not have any refining or retail businesses, although they do upgrade the bitumen produced by their oil sands. Also, while they are an oil sands producer, both by mining and in situ extraction, they also have assets in the U.K. North Sea and Africa offshore (Côte d'Ivoire), plus conventional oil and gas production in Canada, including much more natural gas production than the other two companies. 

Remember what it is that we like about royalty trusts and long reserve life, slow decline Canadian oil companies. They both avoid the principal-agent problem that afflicts other types of oil and gas producers with small amounts of reserves that need to be replaced often in order for managements to keep their jobs. Those companies have a poor track record of creating long term value for shareholders because management's incentives are bad. They need to buy assets to keep their companies from liquidating (and losing their jobs), but they only have the money to buy assets at the top of the cycle when properties are expensive. The companies that fracked for shale over the past decade managed to transfer almost all of their investors capital (both equity and debt!) to sellers of land and service providers.