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Tickers in this Article: SU, ECA, CNQ
We are maintaining our Neutral recommendation on Canadian Natural Resources Ltd. (CNQ) - one of the leading energy companies in Canada. The company is characterized by its low-risk business model, cost-efficient operational base and healthy financial position. However, the weak macro backdrop and unexpected operational disruptions at various projects keep us on the sidelines. Canadian Natural - which competes with other domestic behemoths like Encana Corp. (ECA) and Suncor Energy Inc. (SU) - is engaged in the acquisition, development and exploitation of crude oil and natural gas properties. The company's core operations are focused in western Canada, the United Kingdom sector of the North Sea and offshore West Africa.

Calgary, Alberta-based Canadian Natural delivered a mixed performance for the first quarter of 2012. The company missed our earnings per share projection but was able to beat on revenues. The quarter's results were influenced by a strong production mix and higher realized prices for crude oil, partially offset by lower volumes in the North Sea and Offshore Africa, and steeper production costs.

We believe that Canadian Natural enjoys the position of being the largest heavy oil producer in Canada with a leading land and infrastructure position. The company - with its effective low-cost operational base - currently holds over 8,000 drilling locations in inventory. It also has a vast and rich undeveloped acreage in Western Canada, where activities are expected to start in the near future.

Looking ahead, Canadian Natural targets high production and has invested heavily in developing various oil plays. The company expects light oil and natural gas and liquids in Canada to grow 16%, primary heavy oil to increase 19% and thermal in situ heavy oil to expand 8% in 2012. We believe that extensive drilling activities, planned investment strategies and advanced technological applications will aid the company in accomplishing the set goal.

However, we remain skeptical as these long-term oil projects call for large capital outlays and several years of development before any cash flow is realized. Hence, cost and time overrun as well as operational accidents in the ongoing projects will likely have a negative impact on the stock's performance.

Moreover, a major portion of Canadian Natural's production/reserves growth in the last few years has come from property acquisitions, exposing it to acquisition-related risks. If the company fails to complete accretive transactions on schedule in the future, it could hamper its growth momentum.

The oil and gas prices, which are inherently volatile and subject to complex market forces also, pose as significant threats to the company. Realized prices could differ significantly from our estimates, thereby affecting the company's revenues, earnings and cash flow.

Hence, we think that there is little room for the stock to move upside from current levels. Canadian Natural retains a Zacks #3 Rank that translates into a short-term Hold rating.

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