Canadian Natural Reports In-line Second Quarter Results

On Thursday, August 7, Canadian Natural Resources Limited (CNQ), exploration and production (E&P) company, posted mixed second quarter earnings results, largely in-line with our estimates and Street consensus. Discretionary cash flow of $2.35 per share was to some extent below our forecast of $2.37 and consensus of $2.41. Earnings from ongoing operations of $1.04 per share were to some extent ahead of our forecast of $1.00 and in-line with Street consensus at $1.03. The second quarter production averaged 817,500 BOE per day, ahead of both our forecast of 806,000 BOE per day and Street consensus of 807,900 BOE per day. Yet, delays in approval for the steam flood at Primrose East and mechanical problems at Kirby have translated in reduced In Situ production outlook for the full-year by a mid-point of 10,500 barrels per day.

We are reducing our 2014 cash flow forecast to $9.26 per share from $9.48 but are reiterating our 2015 forecast of $10.54. However, we are also increasing our EPS estimate to $3.97 from $3.94 in fiscal year 2014 and $4.33 from $4.24 in 2015.  Our anticipation assumes production of 803,326 BOE per day in 2014 and 909,288 BOE per day in 2015. While the reduced guidance should not be ignored, we notice that company previously declared that In Situ production would be at the lower end of the earlier guidance, so thermal production estimations had already been lowered.

We are reiterating our “Outperform” rating and $53 target price. The firm has a solid and diversified portfolio of development projects with the ability to create noteworthy long-run value for shareholders. In the short run, we anticipate that performance of share price will be optimistically affected by the battering anticipation for western Canadian crude oil and the likely IPO of a dividend paying Royalty Company. We also anticipate that the persevered growth in operating performance at Horizon could optimistically affect investor confidence and help in growth of valuation multiple. Our $53 target price indicates a 2015 estimated EV/EBITDA multiple of 5.3 times and a moderate discount to our 2014 net asset value forecast of $54.70.

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