Ready for Takeoff: Oil and Natural Gas Producers
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Most of the companies with exposure to natural gas have been beaten down by the Street. North America has seen a boom in natural gas production thanks to the technological improvements that have put tremendous pressure on gas prices However, the gas prices are recovering, as the fears regarding a shortage in gas storage facilities are no longer warranted.
The nuclear disaster in Japan has encouraged the government to shift to safer energy sources. Analysts believe that by 2020, Japan would be fully powered by natural gas fired electricity. Germany is also expected to completely shift to natural gas fired power generation by the end of this decade. Additionally, the 45% decrease in the rig count indicates that long term prospects of natural gas are great. We believe that Canadian Natural Resources (NYSE: CNQ) holds a good future, and here are a few reasons to support the claim.
Canadian Natural Resources is the leading natural gas and oil producer in Canada. The firm mainly operates in North America and according to Reuters, Canadian Natural Resources on Dec. 31 2011, had proven oil reserves of 4.44 trillion cubic ft. and natural gas reserves around 6.1 trillion cubic ft.
In the recent Q2 financial results, the company reported an EPS of $0.68 up nearly 75% compared to Q1, but due to the falling crude prices, EPS fell 20% on a YoY basis. Cash flow from operations surged 37% compared to the previous quarter.
The oil production stood at nearly 471,000 barrels/day and the natural gas production at 1,255 million cubic ft. /day. Most of the natural gas E&P companies in business are cutting down their production levels. Unlike its peers, Canadian Natural Resources retained its natural gas production levels, and is looking to ramp up the production of oil by up to 22% by the end of this year. The rising prices of both the commodities would only strengthen the bottomline of the company.
The company currently has an expansion project at Horizon Oil Sand’s project is still underway. The management expects the oil production levels to be around 250,000 barrels/day once the development is complete. This project would boost the existing oil production by 53%, and with the oil prices on the rise, this project is expected to be a huge catalyst for the company.
The company shares its market space with Anadarko Petroleum (NYSE: APC), Suncor Energy (NYSE: SU) and Imperial Oil (NYSEMKT: IMO).
|
Company |
Forward P/E |
Net Profit Margin |
Debt/Equity |
EPS growth expected next 5 yrs. |
|
Canadian Natural |
10.89x |
19.16% |
36% |
14.50% |
|
Anadarko |
16.05x |
-9.15% |
73% |
4.93% |
|
Suncor Energy |
10.57x |
11.02% |
28% |
4.16% |
|
Imperial Oil |
11.52x |
11.29% |
8% |
4.17% |
All the peers except for Anadarko Petroleum trade at similar valuations. Imperial oil has the lowest debt/equity levels with CNQ third in line. However Canadian Natural Resources enjoys the highest net profit margins, and analysts expect EPS growth over the next 5 years to average around 14.5%. Additionally CNQ has a PEG ratio of 0.81x which indicates that the stock is undervalued keeping its growth prospects in mind. To top it all, the company yields a modest 1.4% paying out a meager 15% of its earnings.
The company is largely involved in the production of natural gas, but is looking to catch up in its oil production. Though the financial results received a mixed response from the market, the long term prospects make the stock an interesting investment option. Since the production levels have not been lowered, we believe that with the rising oil and natural gas prices, Canadian Natural Gas would be a rewarding investment.
PiyushArora has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
