Bloomberg News

Canadian Natural Plant Fix Signals Stock Gains: Corporate Canada

May 07, 2013

Canadian Natural Resources Ltd. (CNQ), the country’s third-largest energy company by market value, is forecast by analysts to rally further after fixing a problem- plagued oil-sands plant.

The Calgary-based oil and gas company has emerged from its first winter in three years without a major shutdown at its 110,000 barrel-a-day Horizon upgrader in Fort McMurray, Alberta. The repairs to the equipment, which turns heavy oil into higher- priced light oil, helped send the stock 3.1 percent higher this year through yesterday, second-best after Talisman Energy Inc. (TLM) among eight Canadian producers with a market value greater than C$10 billion ($9.9 billion).

Canadian Natural is investing C$2 billion a year to more than double Horizon’s size by 2017, and says the project’s reliability will be improved further after maintenance this month.

“It’s been a huge overhang on the stock, especially because they are investing so much money on the Horizon expansion,” Michael Dunn, analyst with FirstEnergy Capital Corp. in Calgary, said by phone yesterday. “The stock is cheaper than it otherwise would be, and we do see quite a bit of upside.”

Eighteen of 25 analysts rate the company a buy while seven say hold. The mean of 20 analyst price targets puts the company’s stock at C$38.02 a share 12 months from now, or 29 percent more than the closing price of C$29.52 in Toronto yesterday. The shares rose 1.2 percent to C$29.88 at 4:22 p.m. today.

Shorts Decline

Fixing the mechanical issues at Horizon has been a “very high priority” Steve Laut, the company’s president, said in a phone interview May 3. “I think we’ve seen reliability increase dramatically and I expect it to continue to increase.”

Canadian Natural, which has a market value of C$32.3 billion, has dropped 36 percent over the five years through yesterday, compared with a 30 percent fall in the 58-company Standard & Poor’s/TSX Energy Index and a 14 percent decline in the broad S&P/TSX Composite index.

Short-interest in the stock has dropped after rising to 23.2 million shares on April 15, the highest in at least 10 years, according to data compiled by Bloomberg. Short sellers borrow a stock in anticipation of a price decline so they can buy it back at a lower price, repay the loan and pocket the difference.

The Horizon upgrader was damaged in January 2011 after a fire broke out in a coker used to process oil-sands bitumen. As the company revealed that plant would be down for an extended period, Canadian Natural’s shares sank 44 percent to a low of C$27.96 on Oct. 4 from March 2. The plant was ultimately shut down from Jan. 6 to Aug. 16.

Production Rises

Another breakdown occurred in February last year in a fractionator, a large steel tower used to separate crude oil into various products.

With those mechanical issues behind it, first-quarter production of 109,000 barrels a day at the upgrader this year was near the top of its guidance and more than double year- earlier levels. Combined with a recovery in prices for Canadian heavy oil from record lows in December, Canadian Natural’s shares have risen, Dunn said.

“Execution is vital with resource companies,” Sadiq Adatia, Toronto-based chief investment officer with Sun Life Global Investments Inc., said by phone yesterday. His firm manages C$6.4 billion and he owns shares of Canadian Natural through Exchange Traded Funds. “If you’re not performing well on execution, you’re not participating in any run up in commodity prices.”

Export Bottleneck

Oil prices have been volatile. Western Canada Select, the Canadian benchmark, narrowed to a discount of about $12 a barrel below U.S. prices in mid-April from a record low $42.50 on Dec. 14 as U.S. refineries restarted after maintenance and demanded more crude imports. Canadian output also dipped during spring maintenance and the so-called spring breakup, when drilling and equipment transportation are slowed by mud.

The discount widened again to $24.25 a barrel yesterday, as more production comes back online.

One risk to Canadian Natural’s future performance will be the fate of new export pipelines out of Canada. Laut said Canadian Natural will benefit when Enbridge Inc. (ENB)’s Flanagan South pipeline from Illinois to Oklahoma is complete next year, allowing it to send more heavy oil to refiners on the U.S. Gulf Coast. Beyond that, Canadian Natural will need a new export pipeline like TransCanada Corp. (TRP)’s Keystone XL, or a Canadian export pipeline to the coast, Laut said.

Low Expectations

Dunn also warned that Horizon could experience problems again. “The proof will still be in the pudding,” Dunn said. “I suspect myself and others are still not willing to assume it will be producing 110,000 barrels a day on an average annual basis.”

Canadian Natural reported fourth quarter profit dropped 58 percent to C$352 million or 32 cents a share from C$832 million or 76 cents a share a year earlier on lower crude prices and a foreign-exchange loss. The stock carries a price-earnings ratio, a measure of a stock’s price compared with its earnings, of 19 according to data compiled by Bloomberg.

“The stock continues to look really cheap,” said Lanny Pendill, an analyst with Edward Jones & Co.

“As a whole, market expectations for Canadian Natural are pretty low and the slight pop we’re getting is partly due to the overall market but also due to the fact that there is light at the end of the tunnel and this company is executing,” Pendill said by phone from St. Louis.

To contact the reporter on this story: Edward Welsch in Calgary at ewelsch1@bloomberg.net

To contact the editors responsible for this story: Jacqueline Thorpe at jthorpe23@bloomberg.net; Dan Stets at dstets@bloomberg.net


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