Carbon Policy And Methane Rules Will Pressure Oil Sands Margins Over Time

Catalysts

About Canadian Natural Resources

Canadian Natural Resources is a large Canadian oil and gas producer with a focus on long life, low decline Oil Sands, thermal in situ and conventional assets.

What are the underlying business or industry changes driving this perspective?

• Heavy reliance on long life, zero or low decline Oil Sands mining and upgrading assets means future tightening of carbon pricing and methane rules could increase per barrel costs and compress net margins over time.
• Deferral of the approximately $8.25b Jackpine Mine expansion because of unresolved regulatory policy on carbon and methane points to potential delays or cancellations of large growth projects. This could cap long term production growth and limit revenue expansion.
• Large exposure to Canadian natural gas at a time when the system is described as full and LNG export capacity beyond LNG Canada is still uncertain leaves the company dependent on infrastructure approvals and build outs that may be slow. This could restrain pricing uplift and pressure cash flow from gas.
• Raising dividend payouts for 26 consecutive years and moving to higher free cash flow payout thresholds at net debt levels of $16b and $13b commits more cash to shareholders. This could reduce flexibility to fund large future projects internally if costs rise or earnings soften.
• Continuous improvement and cost reduction gains at assets like Albian and Horizon are already well advanced, so incremental efficiencies from shared equipment, contractors and higher utilization may be smaller. This could limit further operating cost reductions and leave earnings more sensitive to higher input costs or lower pricing.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more pessimistic perspective on Canadian Natural Resources compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Canadian Natural Resources's revenue will decrease by 5.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 26.3% today to 14.3% in 3 years time.
• The bearish analysts expect earnings to reach CA$5.5 billion (and earnings per share of CA$2.79) by about August 2029, down from CA$11.8 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as CA$11.5 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 27.4x on those 2029 earnings, up from 12.0x today. This future PE is greater than the current PE for the US Oil and Gas industry at 21.3x.
• The bearish analysts expect the number of shares outstanding to decline by 1.04% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.44%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Record 2025 operational performance with production of 1,571,000 BOEs per day, 15% year over year growth in volumes, several production records across liquids, thermal and natural gas, and operating costs such as $18.44 per barrel for total corporate liquids and $22.66 per barrel for Oil Sands mining and upgrading suggests the asset base is currently efficient and productive. This could support revenue and earnings more than a bearish view implies and help to protect net margins.
• Growth in long life reserves, with total proved reserves at 15.9b BOE and total proved plus probable reserves at 20.75b BOE along with a high share of zero or low decline assets and reserve life indices of 31 years for total proved and 40 years for total proved plus probable, provides a large production runway. This could underpin long term production levels and cash flow, supporting revenue and earnings durability.
• Management highlights continuous improvement, cost reductions, and synergies from acquisitions such as full ownership of the Albian mines with targeted annual savings of about $30m to $40m, as well as low FD&A costs of $3.64 per BOE for total proved reserves and $2.42 per BOE for total proved plus probable reserves. These factors could help offset cost pressures and support stable or resilient net margins and earnings.
• The company reports adjusted net earnings of $7.4b, adjusted funds flow of $15.5b, net debt at approximately $16b with debt to EBITDA of 0.9x and liquidity of over $6.3b, alongside 26 years of consecutive dividend increases and a policy that raises shareholder payout thresholds when net debt declines. Together, these elements point to financial flexibility that may allow continued shareholder returns while funding operations, supporting earnings and cash flow stability.
• Organic and acquisition driven growth opportunities such as the Pike 2 70,000 barrel per day SAGD project, Jackfish Brownfield expansion and a robust multilateral drilling program with short payout periods, plus the potential for additional LNG export capacity to relieve a tight AECO gas system over time, could support production and monetization of reserves. This may help sustain or increase revenue and support net margins and earnings over the long term.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Canadian Natural Resources is CA$62.0, which represents up to two standard deviations below the consensus price target of CA$71.14. This valuation is based on what can be assumed as the expectations of Canadian Natural Resources's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$90.0, and the most bearish reporting a price target of just CA$62.0.
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be CA$38.0 billion, earnings will come to CA$5.5 billion, and it would be trading on a PE ratio of 27.4x, assuming you use a discount rate of 6.4%.
• Given the current share price of CA$68.38, the analyst price target of CA$62.0 is 10.3% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.