Canadian Natural Resources Earnings: Deleveraging and Accelerating Returns

Key Morningstar Metrics for Canadian Natural Resources

• Fair Value Estimate
  : C$56.00
• Morningstar Rating
  : ★★
• Morningstar Economic Moat Rating
  : Narrow
• Morningstar Uncertainty Rating
  : High

What We Thought of Canadian Natural Resources’ Earnings

Canadian Natural Resources CNQ generated enough cash to reach its first net debt target of C$16 billion. Share repurchases were C$300 million in the quarter and C$700 million year to date, showing a commitment to the return strategy.

Why it matters: C$16 billion net debt is the first breakpoint for 75% of free cash flow being returned. At current strip pricing, we expect net debt to be below C$13 billion by mid-2027. At that point, 100% of free cash flow is expected to be returned to shareholders.

• The dividend could push higher at strip pricing, but we think a mid-cycle environment gets tighter at around 50% of free cash flow. We would like to see returns prioritize a mix of variable dividends and share repurchases, coupled with modest dividend increases.
• Management has aggressively repurchased shares as its climbed, but the stock has averaged C$60 per share. We see the threat of material value destruction should the share price appreciate rapidly.

The bottom line: We are slightly increasing our fair value estimates to C$56 and USD 41 per share from C$55 and USD 40 after refreshing our model. Our USD fair value uses a 1.36 CAD/USD conversion of our C$fair value.

• We see shares as fairly valued, trading in 3-star territory. Our narrow moat rating, High Uncertainty Rating, and Standard Capital Allocation Rating are unchanged.

Long view: The Bridger pipeline, a successor to Keystone XL, is reported to have secured 90% of the required volume commitments to proceed. Canadian Natural’s management has communicated that production growth is functionally gated by pipeline capacity, which is near full for the WCSB.

• Major buildouts at the mines require committed takeaway as they need consistent utilization for adequate returns. If pipelines proceed, Canadian Natural has C$13 billion in projects awaiting approval.