Canadian Natural Stays Neutral

We are retaining our Neutral recommendation on Canadian Natural Resources (CNQ) based on its satisfactory performance over the last few months.

The company’s second quarter 2010 earnings per share and revenues successfully exceeded the Zacks Consensus Estimates, aided by increased production, lower per unit operating costs, lower development capital costs and significant free cash flows.

However, Canadian Natural incurred a higher capital expenditure for the quarter, on a year-over-year basis, given the purchase of crude oil and natural gas producing assets and under-utilized land in Western Canada.

For the third quarter of 2010, management expects to generate production in the range of 414,000 barrels per day (Bbl/d) to 445,000 Bbl/d of liquids and 1,247 million cubic feet per day (MMcf/d) to 1,271 MMcf/d of natural gas. The company also has plans to drill 25 natural gas wells and 330 net crude oil wells in the same period.

For 2010, Canadian Natural expects oil and natural gas liquids (NGLs) production at 421,000 Bbl/d to 449,000 Bbl/d while natural gas volumes are likely to be 1,229 MMcf/d to 1,256 MMcf/d. Capital expenditures on the part of the company are estimated to reach approximately C$4.94 billion in 2010.

Our Take

We appreciate Canadian Natural’s extensive assortment of low-risk exploration and development projects capable of yielding long-term volume growth at above-average rates. The Phases 2 and 3 of the Horizon oil sands program along with the Thermal In Situ Oil Sands Project in Kirby are considered to be influential drivers for the company’s progress over the remainder of the year.

The company also stands to benefit from stable international operations, strong financial structure and an accomplished managerial team.

In keeping with the nature of the industry, Canadian Natural has to combat the adverse effects of volatile oil and gas prices and operational risks associated with drilling activity. Labor and material cost inflation and time overrun in the ongoing projects may hinder the company’s growth.

We currently have a Zacks #3 Rank (short-term Hold recommendation) on the stock.

CDN NTRL RSRCS (CNQ): Free Stock Analysis Report

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