Increasing Canadian Natural's Fair Value; Stock Looks Cheap, With an Attractive Yield

We are increasing our fair value estimate for no-moat Canadian Natural Resources to $33 (CAD 42) from $28 (CAD 35), driven by increased near-term commodity price forecasts and an increase in our long-term U.S. Gulf Coast pricing for heavy oil. Trading near $26 (CAD 33), we see nearly 30% upside in the 4-star stock. We think that the market is overlooking the company’s ability to generate cash flow amid low commodity prices. While Canadian Natural is among the largest oil sands producers, not all of its production depends on the heavy oil discount, as two thirds of its bitumen production is upgraded into light synthetic oil. Additionally, Canadian Natural's portfolio spans a wide range of hydrocarbons that allow it to enjoy a corporate break-even under $35/bbl of West Texas Intermediate, including its generous dividend payment, and is the best in class among oil sands producers. However, we caution investors that we don’t expect the stock price to fully appreciate toward our estimate until oil prices recover, pipeline expansions are built, and the company increases its market access.