March 12, 2015 Canadian Natural Resources Ltd. (CNQ-NYSE) Current Recommendation Prior Recommendation Underperform Date of Last Change 06/30/2013 Current Price (03/11/15) $28.82 Target Price $30.00 NEUTRAL SUMMARY We are maintaining our Neutral investment thesis on Canadian Natural Resources. The company s large, diversified oil and gas asset bases, together with international exposure and a well-balanced blend of conventional and unconventional prospects, provides a buffer against uncertainties in the sector. Though the Horizon expansion project should aid growth in the long term, the reduction in 2015 capital spending may slow exploration and drilling activities, thus hampering profits. Moreover, CNQ s exposure to the inherently cyclical and volatile E&P sector remains a key area of concern, in our view. Predictably, the oil price slump has adversely affected the group s earnings and cash flows. SUMMARY DATA 52-Week High $46.23 52-Week Low $26.56 One-Year Return (%) -17.41 Beta 1.41 Average Daily Volume (sh) 3,084,328 Shares Outstanding (mil) 1,091 Market Capitalization ($mil) $31,449 Short Interest Ratio (days) 2.95 Institutional Ownership (%) 64 Insider Ownership (%) 5 Annual Cash Dividend $0.73 Dividend Yield (%) 2.53 5-Yr. Historical Growth Rates Sales (%) 9.9 Earnings Per Share (%) 1.4 Dividend (%) 27.3 using TTM EPS 9.2 using 2015 Estimate 84.8 using 2016 Estimate 24.6 Zacks Rank *: Short Term 1 3 months outlook 4 - Sell * Definition / Disclosure on last page Risk Level * Above Avg., Type of Stock Large-Value Industry Oil-C$ Exp&Prod Zacks Industry Rank * 224 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 3,726 A 3,698 A 4,482 A 3,760 A 15,666 A 2014 3,989 A 4,923 A 4,331 A 3,860 A 17,103 A 2015 3,650 E 3,554 E 2,900 E 2,575 E 12,679 E 2016 15,324 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses)* Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.37 A $0.41 A $0.90 A $0.50 A $2.18 A 2014 $0.77 A $0.95 A $0.82 A $0.61 A $3.15 A 2015 $0.15 E $0.16 E $0.02 E $0.01 E $0.34 E 2016 $1.17 E Projected EPS Growth - Next 5 Years % 8 2015 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606
OVERVIEW Calgary, Alberta-based Canadian Natural Resources Ltd. (CNQ) is engaged in the acquisition, development and exploitation of crude oil and natural gas properties. It is one of the largest independent exploration and production (E&P) companies in Canada, with extensive heavy crude oil and natural gas developments. Canadian Natural Resources core operations are focused in western Canada, the United Kingdom sector of the North Sea and offshore West Africa. As of 2014-end, the company had approximately 5,511 million oil-equivalent barrels (MMBOE) in total proved reserves, of which 82% was crude oil/liquids and 18% natural gas. Additionally, Canadian Natural had approximately 3,593 million barrels in total proved and probable reserves in its oil sands (naturally occurring mixtures of bitumen water and sand) operations in the Province of Alberta. Production averaged 790,410 oil-equivalent barrels per day (BOE/d) during 2014, comprising 67% crude oil/ liquid hydrocarbons and 33% gas. Till date, the company s most prominent initiative is its Horizon Oil Sands Project in the Athabasca oil sands play of northern Alberta. Canadian Natural achieved the first synthetic crude oil production from the $8.3 billion project in Feb 2009. Designed to produce 110,000 250,000 barrels of synthetic crude per day, the company completed Phase I construction of the project in 2009. Canadian Natural has already brought online the Phase 2A expansion project and expects Phase 2B to be ready by late 2016. The Canadian oil sands, with their estimated 200 billion barrels of recoverable reserves, are the only oil resource to rival that of Saudi Arabia. The company s estimates indicate 6 8 billion net recoverable barrels for its Horizon acreage. REASONS TO BUY Canadian Natural Resources has a broad portfolio of low-risk exploration and development projects that yield long-term volume growth at above-average rates. We appreciate the company s diverse asset base both geographically and in terms of products, comprising approximately 33% natural gas and 67% crude oil with the bulk of production located in G8 countries. We believe that this significantly reduces the company s risk profile and lends its results a high level of stability. In addition to conventional oil and gas production assets, Canadian Natural is also a major oil sands player with several projects in inventory. The company s Horizon oil sands project has contributed significantly to production volumes. Canadian Natural plans expansion and production ramp up at the project, which should boost volumes. The company expects annual production eventually ramping up to 500,000 barrels per day (Bbl/d), thereby significantly augmenting Canadian Natural s long-term production growth profile. Canadian Natural is working toward cost management and capital flexibility which should work well for it. In addition to a cut in 2015 capital spending the company has announced a 10% salary cut to reign in the costs. Moreover, Canadian Natural added that it intends to monetize its royalty lands business in 2015 if prices are favorable. This could bring in additional funds for the firm. Canadian Natural displays a healthy financial position, reflected by a debt-to-capitalization ratio of 33%, making the company less susceptible to financial risks. This has enabled management to hike dividend for 15 consecutive years. Equity Research CNQ Page 2
REASONS TO SELL Being an exploration and production firm, the plunge in crude prices the commodity having fallen over 50% since June last year has put pressure on Canadian Natural s financials as it has been able to extract less value for its products. Canadian Natural has slashed 2015 capital guidance to $6.05 billion, substantially below the 2014 capital spending of $11.7 billion, to tackle the pricing woes. However, the reduced capital deployment is likely to result in lower drilling activities, thus hampering production volumes. Canadian Natural pursues long-term oil projects, which call for large capital outlays and several years of development before any cash flow is realized. Therefore, cost and time overrun in the company s ongoing projects have a negative impact on the stock s performance. Environmental organizations argue that oil sand crude are greenhouse-gas intensive, thereby contributing to global warming. As such, there have been widespread regulations over Canada s oil sands development in an attempt to stem global climate change and meet the country s emissionsreduction goals. These policies could impact the future profitability in the oil sand business. RECENT NEWS Fourth-Quarter 2014 Results On Mar 5, 2015, Canadian Natural Resources reported fourth-quarter 2014 earnings (excluding one-time and non-cash items) of C$0.69 (approximately US$0.61) per share. This marks a substantial increase from the year-ago quarter s adjusted profit of C$0.52 courtesy of higher production and improved natural gas realization. Reduced expenses also contributed to the year-over-year improvement. Shares gained over 4% on the NYSE following the results. However, the bottom line failed to meet the Zacks Consensus Estimate of US$0.78 amid falling crude realizations. The independent exploration and production company reported quarterly revenues of C$4,384 million (US$3,860 million), significantly higher than the year-ago figure of C$3,947 million. The reported figure, however, lagged the Zacks Consensus Estimate of US$5,057 million. For the year ended Dec 31, 2014, Canadian Natural reported earnings of C$3.47 (US$3.14) per share, which surpassed the Zacks Consensus Estimate of US$2.97 and was also substantially higher than the year-ago level of C$2.23. Revenues totaled C$18,863 million, up from C$16,145 million in 2013. Canadian Natural s fourth-quarter cash flow from operations a key metric to gauge its capability to fund new projects and drilling amounted to C$2,368 million, higher than the fourth-quarter 2013 level of C$1,782 million. Dividend The company declared a quarterly cash dividend of C$0.23 per share, up 2.2%. The dividend will be paid on Apr 1, 2015 to shareholders on record as of Mar 16, 2015. Equity Research CNQ Page 3
Production Canadian Natural reported quarterly production of 860,920 barrels of oil equivalent per day (BOE/d), 27% higher than 677,242 BOE/d in the prior-year quarter. Natural gas production increased to 1,733 million cubic feet per day (MMcf/d) from 1,195 MMcf/d in the fourth quarter of 2013. Oil and natural gas liquids (NGLs) production increased to 572,040 barrels per day (Bbl/d) from 478,038 Bbl/d in the year-ago quarter. Realized Prices On a reported basis, the average realized liquid price (before hedging) during the fourth quarter was C$62.80 per barrel, down nearly 10% from the corresponding quarter last year. However, the average realized natural gas price (excluding hedging) during the three months ended Dec 31, 2014 was C$4.32 per thousand cubic feet (Mcf), up from the year-ago level of C$3.62 per Mcf. Total Expenses Total expenses came in at C$2,906 million, reflecting a decline of over 15% from C$3,428 million in the year-earlier quarter. Capital Expenditure & Balance Sheet Canadian Natural's total capital spending during the reported quarter was C$2,220 million as against C$2,091 million in the year-ago quarter. As of Dec 31, 2014, Canada s second-largest natural gas producer had C$25 million cash and cash equivalents and long-term debt (including current portion) of C$14,002 million, representing a debt-tocapitalization ratio of approximately 33%. Guidance The company anticipates capital expenditures in 2015 to be C$6.04 billion, down C$150 million from the previous guidance. Canadian Natural expects first-quarter liquid production of 591,000 617,000 Bbl/d and natural gas production in the 1,785 1,805 MMcf/d range. Canadian Natural anticipates 2015 liquid production to range between 562,000 Bbl/d and 602,000 Bbl/d. The company estimates natural gas production to average between 1,730 MMcf/d and 1,770 MMcf/d. Other Updates Canadian Natural announced that it plans a 10% salary cut as a cost control measure to withstand the current weak commodity pricing market. The pay cut will be effective from Mar 1. Additionally, the board will reduce its annual cash retainer by 10%. The company also added that it intends to monetize its royalty business in 2015, the timing of which will depend upon the commodity pricing environment. Equity Research CNQ Page 4
VALUATION We like Canadian Natural Resources for its diverse asset base, strong financial backup and efficient management team. The company is also a major oil sands player with a number of projects in inventory and a major development currently ramping production. However, we believe that these factors are adequately reflected in the present valuation, leaving little room for meaningful upside from the current levels. Moreover, Canadian Natural s financials are greatly exposed to crude prices, which have seen a substantial decline over the past few quarters. Also, the reduced capital spending plan is likely to result in lower exploration and drilling activities, which could impede production growth. As such we maintain our Neutral recommendation on the company s shares. Canadian Natural Resources trailing 12-month P/CF multiple is 4.7, compared to the 4.5 average for the peer group and 14.6 for the S&P 500. The company s trailing 12-month EV/EBITDA multiple is 5.3, compared to the industry average of 8.4. Our $30 price objective represents a multiple of 4.9x trailing 12-month cash flow. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Canadian Natural Resources Ltd. (CNQ) 84.8 24.6 8.0 4.7 9.2 29.6 9.6 Industry Average 68.1 29.0 8.2 4.5 25.8 114.1 22.0 S&P 500 16.3 15.2 10.7 14.6 17.9 18.4 12.0 GeoGlobal Resources Inc. (GGLR) Antrim Energy Inc. (ATGYF) 7.6 1.2 Encana Corp. (ECA) 36.5-0.6 3.5 12.3 54.8 9.3 Pacific Rubiales Energy Corp. (PEGFF) 0.4 1.5 21.0 1.5 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Canadian Natural Resources Ltd. (CNQ) 1.2 2.7 1.2 12.3 0.4 2.5 5.3 Industry Average 0.8 0.8 0.8-12.4 0.5 3.3 8.4 S&P 500 6.2 9.8 3.2 25.4 2.0 Equity Research CNQ Page 5
Earnings Surprise and Estimate Revision History Equity Research CNQ Page 6
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of CNQ. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1129 companies covered: Outperform - 15.5%, Neutral - 74.8%, Underperform 8.9%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research CNQ Page 7