With the increase of oil prices this year, caused by a variety of macroeconomic factors, Canadian Natural Resources Limited (NYSE:CNQ) seems ready to capitalize. However, is Canadian Natural Resources worth investing in? Let's take a look.
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Background
Based out of Calgary, Alberta, Canadian Natural Resources Limited (CNRL) is a Canadian oil and natural gas company. CNRL is the second largest independent natural gas producer in Canada, and the largest heavy oil producer. With international operations in the U.K. portion of the North Sea and in offshore West Africa in addition to its Alberta operations, CNRL produced over 370,000 barrels per day (B/D), and had natural gas production of over 1,249 million cubic feet per day (MMcf/d). This works out to just over 578,000 barrels of oil equivalent per day (BOE/D) for the first nine months of 2011. Currently, CNRL is targeting 24% crude oil and natural gas liquids production growth, 17% overall barrels of oil equivalent (BOE) production growth and 10% production growth by the end of 2012. By the end of 2012, the company's goal is to hit between 675,000 and 726,000 BOE/D. With revenues of almost $9.6 billion in 2011 net royalties and a product mix of 70% oil and 30% natural gas, CNRL is certainly an interesting play. (Find out how to invest and protect your investments in this slippery sector. For more, see What Determines Oil Prices?)

Financial Analysis
With revenue for the first nine months of 2011 of $9.6 billion net royalties up 0.3% from the same period in 2010, operating earnings of $2.6 billion down nearly 10% and operating cash flow of $3.9 billion down 17% from $4.7 billion, CNRL has had a rough year due to lower oil production. It is important to note that CNRL increased its capital expenditures net of dispositions by $1 billion, or 26%, compared to the first nine months of 2010. (For more on free cash flow, see Free Cash Flow: Free, But Not Always Easy.)

Now let's take a look at some of the common multiples used to valuate oil companies:

Company Market Capitalization P/E EV/EBITDA (ttm) EV/BOE/D Price/Cash Flow EV/2P*
Canadian Natural Resources (NYSE:CNQ) $41.3B 27.6 7.6 $87,087 $7.66 7.28
Suncor (NYSE:SU) $48.1B 12.8 5.5 $103,900 $5.50 9.43
Cenovus Energy (NYSE:CVE) $24.7B 21 8.8 $126,446 $8.50 12.63
Imperial Oil (AMEX:IMO) $36.3B 11.8 7.8 $126,323 $8.64 6.38

*based on fiscal 2010 proved and probable reserves (million barrels of oil equivalent).

Taking a look at these multiples, we can see that CNRL is certainly not cheap, but it is not too expensive either. Against its peers it has the highest P/E ratio, meaning its share price is relatively expensive against its earnings per share, but this does not take into consideration future earnings growth.

Now looking at the rest of the multiples, CNRL has an enterprise value (EV) over EBITDA, also known as the enterprise multiple, of 7.6 which is tied for second highest (lower is better, indicating a stock could be undervalued). Its EV/BOE/D, or EV to production is the lowest at $87,087 per barrel - meaning its EV isn't fully reflecting the amount of production CNRL is producing, showing a sign that it could be undervalued. Its share price over its operating cash flow is second lowest. Lastly, we'll take a look at its EV/2P, or proven and probable reserves. This is a common metric used to valuate oil and gas firms, and we can see that it is trading at a discount to the majority of its oil sands peers.

What does this mean to investors? It means that as of right now CNRL is priced quite favorably against its peers, having either the second lowest or lowest multiple. (For related reading, see 5 Must-Have Metrics For Value Investors.)

Risks
As with any oil company there are risks to consider, as well. Crude oil and natural gas pricing are risks to be considered, as well as their volume due to scheduled maintenance. Other risks are fluctuations in production expenses, foreign exchange rates and income tax expenses.

Speaking of income tax expenses, just recently in March 2011, the U.K. government increased the income tax placed on oil and gas production from 50 to 62%. However unlikely tax rates could change again in future years.

The Bottom Line
By the end of 2012, CNRL plans to grow its BOE production by about 17% to 675,000 to 727,000 BOE/D. It pays a 1% dividend yield, and its multiples are making it look quite favorable. So with that said, if you believe oil prices are heading higher and you're looking for an oil sands play with growth and a dividend yield, CNRL might be worth a closer look. (For more on value investing, see The Value Investor's Handbook.)

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