Independent oil explorer Canadian Natural Resources Ltd. (CNQ) reported better-than-expected second quarter 2010 results, buoyed by increased production, lower per unit operating costs, lower development capital costs and significant free cash flow. Earnings per share, excluding one-time and non-cash items, came in at 63 Canadian cents (62 cents), surpassing the Zacks Consensus Estimate of 55 cents and prior-year quarter’s 59 Canadian cents.
Including special items, the company’s earnings per share were 61 Canadian cents, way above 15 Canadian cents in second quarter 2009.
On May 21, 2010, Canadian Natural shareholders went for a 2:1 stock split. Hence, all per share amounts have been restated to reflect the split.
Total revenue of C$3.61 billion ($3.53 billion) was up 31.4% from the prior-year quarter level. Total revenue also exceeded the Zacks Consensus Estimate of $3.06 billion.
Production
Total production during the quarter was up 9.8% year over year to 649,195 oil-equivalent barrels per day (BOE/d). Oil and natural gas liquids (NGLs) production was up approximately 21.2% year over year to 443,045 barrels per day (Bbl/d), reflecting the higher production from Horizon Oil Sands (“Horizon”), strong volumes due to the cyclical nature of Primrose production and a robust primary heavy crude oil drilling program. However, natural gas production fell 8.5% year over year to 1,237 million cubic feet per day (MMcf/d).
Realized Prices
The average realized crude oil price (before hedging) during the second quarter was C$63.62 per barrel, representing an increase of 6.8% from the corresponding period of the previous year. The average realized natural gas price (excluding hedging) during the three months ended June 30, 2010 was C$3.86 per thousand cubic feet (Mcf), down 6.1% from the year-ago period.
Capital Expenditure & Balance Sheet
Canadian Natural’s total capital spending during the reported quarter was C$1,573 million, as against C$473 million in the year-ago period. The company incurred higher capital expenditures to account for the purchases of crude oil and natural gas producing assets and underutilized land in Western Canada.
As of June 30, 2010, the company had cash on hand of C$19 million and long-term debt of approximately C$9.33 billion, representing a debt-to-capitalization ratio of 30.7%.
Dividend
Canadian Natural declared a quarterly cash dividend on common shares of 7.5 Canadian cents per share payable on October 1, 2010, to shareholders of record as on September 17, 2010.
Guidance
Management is guiding towards production of 414,000 Bbl/d to 445,000 Bbl/d of liquids and 1,247 MMcf/d to 1,271 MMcf/d of natural gas during the third quarter of 2010. The company is planning to drill 25 natural gas wells and 330 net crude oil wells during the period.
For 2010, Canadian Natural expects oil and NGLs production to be 421,000 Bbl/d to 449,000 Bbl/d while natural gas volumes for the year are likely to be 1,229 MMcf/d to 1,256 MMcf/d. It plans to spend approximately C$4.94 billion on capital expenditures in 2010.
Our Recommendation
We are maintaining a long-term Neutral recommendation on Canadian Natural, along with a short-term Zacks #3 Rank (Hold) rating.
We believe that the company offers an attractive mix with a balanced, low-risk conventional asset base along with long-term oil production resource growth. The company also exhibits significant expansion opportunities justified by accretive acquisitions and accelerated sanctioning of oil sands projects. However, the current unfavorable macro backdrop, operational challenges and natural gas price weakness somewhat dampen our optimistic outlook for the stock.
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