Multiple Raised Targets Desjardins Securities analyst Chris MacCulloch thinks Canadian Natural Resources Ltd.’s agreement to buy a swath of Chevron Canada Ltd. oil and gas assets in Alberta brings “an attractive entry point” for what he continues to view as “the highest-quality producer in the Canadian oil & gas sector.”
“Seize the opportunity,” he advised in a research report in which he raised his rating for the Calgary-based company to “buy” from “hold” based on “a more attractive return profile.”
He was one of several equity analysts on the Street to applaud the deal, announced Monday before the bell and sending the Calgary-based company’s shares higher by 3.3 per cent.
“Although the sticker shock of the acquisition’s price tag may have turned some heads, we highlight that it was accretive on all key financial metrics,” said Mr. MacCulloch. “For reference, we expect the newly acquired AOSP [Athabasca Oil Sands Project] and Duvernay assets to generate $1.5-billion of DACF [debt-adjusted cash flow] in 2025 at current strip prices, or $1.1-billion of incremental FCF. By extension, we calculate that the transaction was completed at a 5.7 times 2025 strip EV/DACF multiple, which is highly accretive vs Friday’s (October 4) trading multiple of 7.3 times, although it added considerable balance sheet leverage which necessitated a temporary moderation in FCF allocation to capital returns.
“While acknowledging that the stock’s valuation remains rich vs peers, we believe a premium is warranted given CNQ’s strong track record of operational execution and disciplined capital allocation. We also believe that it provides defensive protection in the event of a sharper deterioration in oil prices given its deep inventory of short- and long-cycle development assets, which was further expanded by yesterday’s transaction —providing flexibility to reallocate capital in response to changing commodity prices.”
In response to the acquisition, which will be funded entirely with cash and includes Chevron’s remaining working interest in the AOSP, the Scotford Upgrader as well as the 70-per-cent working interest in its Duvernay asset, the analyst raised his 2025 cash flow projections as well as his production assumptions, believing “it appears accretive on all key metrics at the cost of increased financial leverage.”
That led him to increase his target for Canadian Natural shares to $59 from $56. The average target on the Street is $55.06, according to LSEG data.
Other analysts making target adjustments include:
* National Bank’s Travis Wood to $53 from $52 with a “sector perform” rating.
“Pro forma, the deal further enhances CNQ’s asset for sustainable FCF [free cash flow] out of the oil sands portfolio as well as the short-cycle, high-impact inventory out of the Duvernay and leaves our revised cash flow estimates 9-10 per cent higher over our forecast period (similar to our FCF forecast),” said Mr. Wood. “Although we do not doubt the company’s ability to capture medium term value through operational effectiveness, we do caution the return of capital profile timelines under forward strip (we do expect this earlier than 2029) and inherently increases the risk around the return of capital outlook in our view. Overall, we have raised our capital spending outlook to include the disclosed $400 million of sustaining capital as well as new project spending.”
* RBC’s Greg Pardy to $62 from $59 with an “outperform” rating.
“Our decidedly bullish stance towards CNQ reflects its strong leadership, shareholder alignment, free cash flow generation, best-in-class operating performance and abundant shareholder returns. We are reaffirming an Outperform recommendation on CNQ and raising our one-year price target by $3 (5 per cent) to $62 per share. CNQ is our favorite senior producer and on both our Top 30 Global Ideas and Energy Best Ideas (published October 1, 2024) lists,” said Mr. Pardy.
* BMO’s Randy Ollenberger to $60 from $57.50 with an “outperform” rating.
“Canadian Natural announced that it is acquiring Chevron’s remaining interests in the WCSB,” he said. “CNQ is the natural buyer of Chevron’s Athabasca Oil Sands (AOSP) stake and was able to consolidate the interest at an attractive price, in our opinion. The Duvernay asset is an added bonus given recent improvements in well productivity and close proximity to the company’s Montney assets. That said, Canadian Natural’s near-term shareholder return potential could be constrained until it reaches its new net debt targets.”
* TD Cowen’s Menno Hulshof to $58 from $56 with a “buy” rating.
“While this deal temporarily increases leverage and triggers a retreat to 60-per-cent return of FCF from 100 per cent, it was well-received by investors given an attractive price tag, strong industrial logic (AOSP in particular, where we expected long-term consolidation) and long history of adding value,” he said.
“Longer-term AOSP consolidation was something that we and many investors had been contemplating for some time. However, while we understand that CNQ kicks the tires on most available marketed assets, we underestimated its interest in CVX’s Kaybob Duvernay. We consider AOSP consolidation at a reasonable price tag a positive (almost inevitable) development and are confident in CNQ’s ability to accelerate Duvernay commercialization. Further, there may be undisclosed items like tax pools that represent upside beyond what is currently understood. We estimate 5-per-cent accretion on 2025 CFPS and 3 per cent on FCFPS, where positive incretion was expected as a balance sheet financed transaction. While a return to 100 per cent of FCF extends beyond 2026 on a backwardated WTI strip, RoC in absolute dollar terms is expected to be similar on a pre-and-post-deal basis given the divi hike and FCF generation from the acquired assets. Our target price increases to $58/share on revised financial and NAV estimates.”
* Raymond James’ Michael Barth to $51 from $48 with a “market perform” rating.
“In our view, this is another large and accretive transaction that adds clear value to shareholders; it reinforces our view that CNQ is one of the best capital allocators in Canadian energy,” he said. “We’ve adjusted our estimates and our target increases to $51.00/share. Despite the increase to our target, we still believe the stock is fairly valued at strip pricing, and therefore maintain our Market Perform rating. The market ‘gets it’.”
* ATB Capital Markets’ Patrick O’Rourke to $60 from $58 with an “outperform” rating.
“Overall, we view the event as positive, adding both cash flow accretion (total deal estimated at 4.8 times CF relative to 2025 estimated strip EV/DACF [enterprise value to debt-adjusted cash flow] of 6.4 times prior to the deal announcement; we model 5.3 per cent per share 2025 cash flow accretion after accounting for increased interest costs and G&A associated with the asset acquisition), as well as the strategic capture of long-term undeveloped resource synergistically adjacent to current operations at AOSP and Horizon,” he said. “The announcement and management call were well-received, with CNQ shares up 3.3 per cent relative to also strong performance from the TSX Capped Energy Index at up 1.9 per cent.”