Dominion Securities analyst raise target price to $60 Calling Canadian Natural Resources Ltd.’s (CNQ-T, CNQ-N) $12.74-billion acquisition of Athabasca Oil Sands Project holdings from Royal Dutch Shell PLC and Marathon Oil Corp. “very positive” for the company, BMO Nesbitt Burns analyst Randy Ollenberger increased his target price for the stock.
“We estimate that the assets will boost cash flow by roughly $2.4-billion and increase free cash flow by $1.8-billion,” said Mr. Ollenberger. “In our view, Canadian Natural provides a unique and compelling investment opportunity that compares very favourably with other oil and gas investments such as shale oil.”
“Canadian Natural Resources is nearing a significant inflection point in its ability to generate free cash flow. The completion of expansions to its Horizon oil sands facility should translate to a material increase in cash flow and decline in capital spending that should allow the company to both grow its dividend and generate meaningful organic production growth.”
In reaction to the deals, announced Thursday, the analyst raised his 2017 earnings per share estimate to $1.42 from $1.34. His 2018 projection jumped to $2.93 from $2.50.
“We expect Canadian Natural to deliver significantly more free cash flow over the next several years following the acquisition, as well as the full ramp up of Phases 2B and 3 of Horizon,” he said. “We estimate the company can deliver $2.8-billion of free cash flow in 2017 and more than $5-billion in 2018 while the [debt-to-cash flow] multiple improves to 1.4 times from 2.6 times. On a per share basis, we estimate that the transaction will boost cash flow 14 per cent in 2017 and 17 per cent in 2018, while net asset value increases by roughly $11.60 per share. In 2018 and beyond, we believe that Canadian Natural will shift its focus back to a combination of organic growth and returning cash to shareholders through dividend growth.”
With an unchanged “outperform” rating, Mr. Ollenberger’s target for the stock rose to $57 from $52. The analyst average target is $52.74, according to Bloomberg.
“At current prices, the shares are trading at a 2017 estimated enterprise value-to-EBITDA multiple of 8.2 times, which is slightly below its peer group average of 8.4 times, despite above-average growth in production and returns on capital,” he said. “The shares also imply a 2018 free cash yield (cash flow minus capital spending) of roughly 12 per cent versus a peer group average of only 2 per cent. We believe the shares will outperform with the full recognition of the company’s free cash flow generative ability and strong production growth over the next 12 months. Our target price implies a 2018E EV/EBITDA multiple of 7.1x and 3-per-cent discount to our 2018 net asset value estimate of roughly $59.”
Elsewhere, Desjardins Securities analyst Justin Bouchard raised his target to $51 from $48 with a “buy” rating (unchanged).
Mr. Bouchard said: “We believe CNQ’s acquisition of AOSP is materially positive for the story based on our view that: (1) AOSP is a top-tier project with attractive investment attributes, including a premium mix of upgraded products, effectively no decline and ultra-longlife production; (2) it was acquired at an attractive valuation; (3) it is materially accretive on a per-share basis; and (4) it offers considerable upside through operational synergies and value-add growth opportunities.”
RBC Dominion Securities analyst Greg Pardy bumped his target to $60 from $55 with a "top pick" rating.
"We firmly believe that CNQ ought to be a core holding for global energy investors given its compelling combination of visible upstream growth and impressive shareholder returns," said Mr. Pardy. "Overarching all of this is management + directors ownership of some 29.2 million common shares (2.4 per cent following the AOSP deal)."