Saturday, October 9, 2021

Canadian Natural Resources (CNQ)

I'm interested in energy producers because I think we're in for a decade of inflation and currency devaluation.  I want companies that are producing crude, without much refining, paying sustainable dividends, and with manageable geo-political and ESG risk.

Extracting flammable materials from deep down is a risky business.  I want to spread the risk by taking many small 2% positions.

An oil producer's job is to extract oil & gas, sell it at a profit, then use some of the profits to replenish or build-up their reserves.  Usually I just take a cursory look at a company's reserves, profits/cashflow, debt, position on the cost curve, and political risk.

I'm looking at the 2nd largest Canadian oil producer CNQ.  I traded it years ago, first got the idea from Hedgeye (who no longer cover it).

Operations and political risk

80% of their 1H21 revenue is from Canadian oil sands, with the remainder from the North Sea and Africa.

There are two main political risks with Canadian oil production:

  • Oil production from Oil Sands is considered environmentally unfriendly.  Theres a risk of ESG pressure or environmental regulation.
  • Canadian oil has no pipeline to a port.  They must rely on the Keystone to the US, whose expansion was cancelled.  Canadian producers sell their oil at WCS prices, at a discount to WTI.
Apart from the above, Canada is a low risk country.  Unlike most other energy producing regions, it does not have political risk (nationalising resources or levying taxes).  And it will never be a war zone.


Canadian oil sands require high fixed investment, but once set up have low or no decline.  Their reserves are effectively infinite.  


Simple to understand, they have fixed costs, and are operationally leveraged to oil prices.  Their 1H results from 2020 and 2021 illustrate this perfectly:

Debt at CAD 19b is a bit higher than I'd like.  They expect to reduce it to 15b by end of 2021.

A Morningstar report from last year estimates their cash breakeven costs at USD 35-40 (WTI).

The quarterly dividend is CAD 0.47.  They did not say they plan to increase it, but will engage in buybacks instead.  After they reach 15bn debt, half the company's free cash flow is targeted to buy back shares (pp11-12).


A (mostly) safe company, without the political or confiscation risk in many parts of the world.  High fixed costs.  Good leveraged play on oil prices.

No comments: