Canada’s Long Term Oil Opportunity: Canadian Natural Resource Ltd (USA) (CNQ)

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Investing is a waiting game. Some may make fortunes overnight, but the majority find profits through years of planning and execution. The world’s energy system is going through major challenges and changes. There are a number of Canadian oil companies which stand ready to profit from these trends. The key is that investors must be willing to watch and wait in order to take advantage of these gains.

The Challenges

Currently, North America’s midstream infrastructure is lacking. The midstream sector plays the important role of transporting oil and gas to the refineries, where they can be transformed into useful products. The future is never certain, but it is expected that companies will have to wait until 2020 for the majority of midstream issues to be resolved.

A number of large producers are starting to see declines in production. Mexico may become an oil importer by 2020. Underinvestment and geological challenges do not paint a positive future. On the other side of the Atlantic the United Kingdom is also dealing with a number of challenges in their declining fields.

CNQ Return on Invested Capital data by YCharts

Canadian Natural Resource Ltd (USA) (NYSE:CNQ) is focused on the oil sands found in Alberta and Saskatchewan. It’s also involved off the coast of West Africa and the northern coast of the United Kingdom. Its low return on invested capital is understandable, with around 25% of its production coming from natural gas. The natural gas market continues to be depressed, and it is expected to remain this way for a couple years.

This company’s long-term prospects make it an interesting play. It owns the largest natural reserve base in Western Canada. It’s planning expansions of 40,000 to 60,000 barrels per day approximately every two years until 2029. Its total debt-to-equity ratio of 0.35 is one of the higher debt loads of the firms examined here, but it is not excessive. Even with its low return on investment of 7.5%, it’s still able to post a relatively strong profit margin of 14%. Once North America’s midstream constraints are removed, Canadian Natural Resources will be a great growth position given their large amount of undeveloped land.

Suncor Energy Inc. (USA) (NYSE:SU) is a major oil sands player with a host of midstream and downstream assets. It still feels the effects of midstream constraints, but its refineries provide strong diversification for its upstream assets. The company recently took a writedown on its Voyaguer project and is undergoing an examination to ensure its future profitability. Even without this project, it will be able to support future production growth with the Firebag projects and the Hebron project off the coast of Newfoundland.

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