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Energy Story: CNQ update

31 March 2020 by jbchevrel

Canadian Natural Resources Ltd. (CNQCN) acquires, explores for, develops, and produces natgas and crude oil. CNQCN operates in the Canadian provinces of Alberta, British Columbia and Saskatchewan. In 2017 it agreed to buy Royal Dutch Shell's oil sands assets in Canada for a bit less than $10BN. It has become one of the country's largest natural gas producers. The company has large oil holdings (light, medium, and heavy crude assets). Mainly in Canada, but also in North Sea and offshore West Africa. CNQCN has reported proved reserves of 3.8BN barrels of oil, bitumen, and natural gas liquids (including 1.9BN barrels of synthetic crude oil), and 4.3TN cubic feet of natural gas. CNQCN produces on average 632KB/D. The CDS is closely linked to crude prices, in a non-linear way. In Jan-Feb, WTI came down -27% (from 62 to 45 with a peak at 66 on Iran/US tensions) and CNQCN CDS widened by just +35bp from 55 to 90. It was still <100bp in the first days of March. Then WTI lost an additional -40% (based on EOY19 level) and CNQCN CDS started diverging to close at a peak 425bp on Mar20. While WTI is still pretty close to the low end ($20), CNQCN CDS has retraced some of the weakness. We close almost 100bp off the close-to-close wide, here at 335bp. WTI had averaged ~$54/bbl over the first 2 months of the year, some analysts see further downside from here, in case this planet runs out of places to store oil. The continuity of such a price environment will probably spur further reductions to capital budgets, and expanding credit lines, for CNQCN. Credit ratings are surely at risk. Based on press releases from the rating agencies, it appears that S&P has taken the most pessimistic view with respect to near-term ratings risk (‘next few weeks’), while Moody’s appear to be exercising a bit more patience. Moody’s also noted that the magnitude of the current price decline is less severe than the drop in 2014-16 and it does not view this as a “structural shift”. As such, Moody’s views a wave of ratings actions as an unlikely scenario. CNQCN ended 2019 with quite strong liquidity position, available liquidity of $4.4B. It is fair to expect share buybacks at CNQCN to be stopped as a 1st order move to preserve liquidity. At the 2nd order, dividend cut is also possible. Aggressive reductions to capital spending budgets are also anticipated. Its peer Husky has already announced (on March 12, 2020) a 27% reduction to its 2020 capital budget. We may well see a capital budget reduction of c20% a minima at CNQCN.