Canadian Natural Resources Ltd.

CNQ : TSX : C$40.63

CNQ : NYSE
BUY  Target: C$46.0

COMPANY DESCRIPTION: 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.

COMPANY DESCRIPTION: 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 ADDING SIGNIFICANT PRODUCTION AT A LOW COST

We reiterate our BUY rating on CNQ post yesterday’s announcement to acquire Devon Energy’s (DVN : TSX| Not rated) Canadian conventional asset package (ex- Horn River basin and heavy oil properties) for $3.12 billion for the following reasons:
While, we were surprised by the move, CNQ did take advantage of the “buyers” market in Canada. It is evident there are plenty of asset packages on the market; recall CNQ retracted its own Montney package on 1/9 due to lack of sufficient interest. To that end, the company paid ~$36,000/boe/d unadjusted ($30,300 per boe/d adjusted for infrastructure), which looks like a steal compared to precedent transactions of ~$51,700/boe/d especially given the higher gas price environment.
The transaction is also accretive on a cash flow basis. To that end, we estimate that CNQ is paying 4.5x 2015E DACFs (when adjusted for infrastructure), which is a discount to the 5.4x that CNQ was trading at prior to yesterday.
Potential spin out of royalty assets. The company plans to either monetize or spin out the combined $140-$150 million annual cash flow royalty free lands post acquisition. Based on Freehold Royalty Trust’s (FRU: TSX | Not rated) current trading multiple, this asset is worth an estimated $1.2-1.3 billion or $1.08-1.16/share.
Balance sheet still looks strong post acquisition. At our price deck, debt/EBITDA is estimated to be 1.13x vs. the peer average of the same level, and CNQ’s pre-acquisition metric of 0.93x.
Still the torque play in the Sr’s space on our positive heavy oil thesis. We estimate the company will still be ~40% levered to heavy oil in H2/14 (down slightly from the prior ~45%), and thus will continue to benefit from our thesis on narrowing differentials.
We are increasing our target by $1 to $46 to reflect the accretion from the acquisition

Canadian Natural Resourses Target $47

Canadian Natural Resources Limited

Canadian Natural Resources Limited (Photo credit: Wikipedia)

Canadian Natural Resources Ltd. 

May 17 2012

CNQ : TSX : C$29.33  Buy , Target C$47.00 

  • Investor Day Highlights 

1)    the improvements seen at Horizon due to the 3rd Ore Preparation Plant (OPP); 

2) an improved outlook for production growth in Primary Heavy Oil and North American Light Oil vs. what the company disclosed at last year’s event (albeit it included higher capex); and  

3 )increased coking capacity in the US that is expected to come on line in 2013.  

Seeing improvements at Horizon since the recent re-start: The 3rd OPP has increased availability from 72% in January to 98% in April (March was 96%). As a result, May month-to-date has averaged 116 MBbl/d, which is up from the 111.4 MBbl/d average for April. Of note, CNQ sees the ability to meet or exceed the top end of its 2012 guidance range of 85-95 MBbl/d. To meet low end, Horizon needs to achieve only ~80% reliability (97.9 MBbl/d based on a 123 MBbl/d stream day rate) for the rest of the year. To meet the high end: Horizon needs to achieve ~90% reliability (111.2 MBbl/d) for rest of year.

CNQ updated its 4+ year production growth outlook by area, and net/net there was a positive revision (with increased costs due in part to increased well count, but a part that shows up in thermal is unidentifiable to us): CNQ raised its production growth expectation for North American Light Oil to 11% CAGR (to about 85 MBOE/d by 2015) from the 7% (to ~65 MBOE/d by 2015) stated last year.

For Primary Heavy Oil, CNQ increased its expectations to where it sees the potential to reach ~150 MBbl/d by 2016 vs. the 130 MBbl/d to be reached by 2014 (and decline thereafter) stated at last year’s Investor Open House. For Pelican Lake, however, it appears CNQ sees ultimate potential to 60 MBbl/d vs. the 70 MBbl/d minimum discussed last year.

For 2013, it looks as if CNQ is guiding for about 715 MBOE/d, which is ahead of our ~700 MBOE/d estimate but in line with the Street’s 713 estimate. Gas prices are a swing factor in the 715 MBOE/d.

2013 will see 310 MBbl/d of incremental heavy oil refining capacity: Specifically, Marathon is adding at its Detroit refinery 80 MBbl/d of Heavy Oil Capacity (while displacing 70 MBbl/d of light capacity) and BP is adding at Whiting 230 MBbl/d of heavy oil capacity (displacing 230 MBbl/d of light capacity). Combined, this adds ~20% new heavy oil capacity to existing total Canadian heavy oil markets, per CNQ.

 TARGET PRICE CALCULATION 

Our $47 target price is based on 4.75x ex-oil sands 2013E DACF plus over $25/share of estimated risked oil sands value. Our target implies the stock could  ultimately trade at 7.2x 2013 EV/DACF. The stock currently trades at 5 x

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