CNQ stock: A Great Way to Play Canada’s Oil Sands

It’s hard to believe that shares of Canadian energy giant Canadian Natural Resources (TSE:CNQ)(CNQ) stock shed over 70% of its value in just a matter of weeks during the coronavirus crash. Oil prices briefly went negative, and it seemed as though all hope was lost for its producers, even best-in-breed ones like Canadian Natural.

Undoubtedly, it took great courage to buy shares of CNQ when it seemed like no bottom could be caught. The stock pretty much got cut in half two times from last year’s brutal market sell-off.

Now, nearly two years later, CNQ stock has not only recovered, but it’s much higher. The stock is about to test new highs, thanks to the incredible relief rally in oil. Today, WTI (West Texas Intermediate) is above $81, a level that would have been absolutely unheard of just a year ago.

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Tides Turned in Oil

This goes to show the immense volatility to be had in the energy markets. As oil looks to break the $100 mark for the first time in many years, Canadian Natural’s strength is likely to continue. Despite posting 406% in gains since the bottom in March 2020, Canadian Natural stock isn’t expensive.

In fact, the stock could prove to be considerably undervalued if oil prices stay elevated. In any case, the valuation seems to imply a margin of safety, such that even a mild correction in oil prices is unlikely to be catastrophic for CNQ.

As such, I am bullish on shares of Canadian Natural, even if the $100 oil boom never ends up coming to fruition. The company is positioned to be wildly profitable here, and any further appreciation in WCS (Western Canadian Select) which could narrow its discount to WTI over the coming years.

Canadian Natural Resources: Value and Yield Worth Venturing North For

There are plenty of crude companies in the U.S., so why would one want to venture north to the Albertan oil patch?

Canadian Natural stock is incredibly well-run, with a valuation that remains depressed, even after its magnificent rally. Shares of the name trade at 1.7 times book value and just under 15 times trailing earnings, at the time of writing.

Furthermore, the company also has an incredible portfolio of assets in the Albertan oil sands. If oil remains as elevated as it is now, Canadian Natural’s production ramp-up could pay massive dividends to its shareholders.

Greedy when Others were Fearful

In the depressed energy environment, Canadian Natural didn’t back down. It played the long-term game, acquiring its way to the very top of Canada’s oil patch. The company bought up assets in the space that many other firms were quick to dispose of at a hefty discount.

Undoubtedly, Canadian Natural made a bold, albeit risky, bet. But it’s finally starting to pay off, following the unprecedented bounce in oil prices.

Canadian Natural isn’t just an oil company, though. It has a natural gas liquids business that’s grown considerably over the years. Instead of ditching assets in the oil patch last year, Canadian Natural decided to diversify itself away from oil with some terrific acquisitions in natural gas, mostly with an acquisition of Canadian natural gas firm Painted Pony Energy, at a time when prices were essentially near the floor.

Indeed, CNQ’s managers were greedy at a time when most others in the space were fearful. Looking back, that proved to be a brilliant move.

Wall Street’s Take

According to TipRanks’ consensus analyst rating, CNQ stock comes in as a Strong Buy. Out of 12 analyst ratings, there are 10 Buy recommendations and 2 Hold recommendations.

As for price targets, the average Canadian Natural price target is $45.59, implying upside of 7.65%. Analyst price targets range from a low of $35.55 per share to a high of $56.56 per share.

The Bottom Line on CNQ Stock

With a commitment to growing its dividend over the long run, Canadian natural is arguably one of the most robust dividend growers in the Canadian energy patch. Its payout ration is 44.87%.

As oil and gas continues running hot, it’ll be tough to keep CNQ stock down. It’s still cheap, given the calibre of business you’re getting and the momentum in the energy sector.

Disclosure: Joey Frenette doesn’t own shares of any mentioned companies at the time of publication.

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