Operational Improvements At Scotford And Horizon Set The Stage For Future Success

Key Takeaways

• Opportunistic acquisitions and focus on production expansions enhance Canadian Natural Resources' production capacity and cash flow, boosting revenue and earnings.
  
• Efficiency improvements and cost reductions across operations improve net margins, supporting sustainable growth and long-term shareholder value.
  
• Potential tariffs, focus on unconventional assets, and regulatory changes may increase costs and volatility, impacting Canadian Natural's revenue stability and net earnings.

Catalysts

Acquires, explores for, develops, produces, markets, and sells crude oil, natural gas, and natural gas liquids (NGLs).

• Canadian Natural Resources is enhancing its production capacity through opportunistic acquisitions, including consolidating a 100% interest in the Albian mines and acquiring Chevron's working interest in Duvernay. These moves are expected to significantly increase production and free cash flow, positively impacting revenue and earnings.
  
• The company has identified untapped growth potential in its thermal operations with 70,000 barrels per day of available processing capacity. By leveraging on-schedule expansions and pad additions, they aim to boost production and optimize costs, thereby improving net margins.
  
• Canadian Natural Resources has implemented debottlenecking and reliability enhancement projects at its Scotford and Horizon facilities, which have already led to record production levels. This increased efficiency will drive higher utilization rates, improving earnings and cash flow.
  
• With a strong focus on continuous improvement, the company has achieved significant reductions in operating costs and increased margins across various asset classes, enhancing net margins and long-term shareholder value.
  
• The company's large, proven reserve base, alongside effective reserve replacement and development strategies, positions it for sustainable growth, supporting higher net asset values and increasing future earnings potential.

Canadian Natural Resources Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Canadian Natural Resources's revenue will grow by 3.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 17.1% today to 21.6% in 3 years time.
• Analysts expect earnings to reach CA$8.5 billion (and earnings per share of CA$4.2) by about April 2028, up from CA$6.1 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CA$9.9 billion in earnings, and the most bearish expecting CA$6.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.8x on those 2028 earnings, up from 15.4x today. This future PE is greater than the current PE for the US Oil and Gas industry at 13.0x.
• Analysts expect the number of shares outstanding to decline by 1.63% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.22%, as per the Simply Wall St company report.

Canadian Natural Resources Future Earnings Per Share Growth

Risks

• The potential imposition of tariffs and their impact on WCS (Western Canadian Select) differentials could unpredictably alter oil prices, potentially reducing revenue and impacting net margins.
  
• Canadian Natural's focus on unconventional assets such as Oil Sands Mining can lead to higher operational and environmental compliance costs, affecting net earnings.
  
• Dependence on market conditions and commodity price fluctuations, particularly in oil and natural gas sectors, can lead to volatile earnings and challenge revenue stability.
  
• The need for significant egress (pipeline and export capacity) to enable production growth may limit near-term organic growth potential, affecting expected cash flows and capital returns.
  
• Political and regulatory changes in key operating regions, particularly around carbon capture and environmental regulations, could increase operating costs and reduce profitability.

Valuation

• The analysts have a consensus price target of CA$54.474 for Canadian Natural Resources based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$63.0, and the most bearish reporting a price target of just CA$44.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$39.5 billion, earnings will come to CA$8.5 billion, and it would be trading on a PE ratio of 15.8x, assuming you use a discount rate of 7.2%.
• Given the current share price of CA$44.82, the analyst price target of CA$54.47 is 17.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.