3 Reasons to Sell Canadian Natural Resources (TSX:CNQ) Stock Now

Bargain investors have been snapping up shares of Canadian Natural Resources Ltd (TSX:CNQ)(NYSE:CNQ), but you should take caution. Here’s why you should sell and never look back.

| More on:
Businessman pulling out wooden brick from toppling stack

Image source: Getty Images.

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn moresdf

Canadian Natural Resources (TSX:CNQ)(NYSE:CNQ) shares haven’t budged in nearly 15 years. Sure, there have been spikes and dips along the way, but the stock is currently still trading at 2005 levels.

While many investors are calling for a resurgence, intelligent investors should sell this stock and walk away. Even if you’re not invested in Canadian Natural, you’ll want to understand this story, for the lessons could impact the rest of your portfolio.

Here’s why Canadian Natural stock, as well as many of its peers, could be facing a difficult future.

Where’s the money?

Eventually, all companies need to turn a profit. Investors can be convinced to forgo near-term upside for long-term growth, but if earnings don’t materialize, it’s hard to consider the business a success.

From a profits standpoint, Canadian Natural’s history looks impressive. Over the last 15 years, the company has only posted an annual loss twice, in 2015 and 2016.

If the company is delivering on profits, why hasn’t the share price moved?

It’s important to know that profits are an accounting metric. They don’t actually represent actual cash. In many cases, a company can post healthy profits while the underlying businesses are bleeding cash. This is especially true for a capital-intensive business.

At the end of the day, investors can never get their hands on accounting profits. The only thing that matters is cash flow, which represents cold, hard cash.

Since 2004, nearly half of all years saw negative free cash flow per share. Cumulatively, the company has only generated US$2.62 in free cash flow per share across 15 years. That’s a terribly underwhelming number.

It seems that the company is putting a greater focus on cash flow this year, but if history is any indication, Canadian Natural’s business simply doesn’t generate enough cash to warrant an investment.

Out of its control

The market is flooding with supply, especially in Canada. Surging output has been putting a big strain on transportation infrastructure, particularly pipelines.

While some upgrades have improved throughput, there’s simply not enough infrastructure to support volume growth. That’s a big issue considering regional volumes are expected to rise nearly every year until 2030.

Last year, local prices fell by more than 50% as producers became desperate to secure pipeline capacity. Alberta was forced to implement a province-wide production cut to balance the market.

The fact is that Canadian Natural’s future is partially beyond its control. If more pipelines aren’t built, the company may be forced to limit production, pay more to secure capacity, or shift to pricey crude-by-rail alternatives.

These issues may ultimately be fixed, but betting on a company that relies on other companies for growth is a difficult proposition.

The death blow

Currently, Canadian Natural estimates its breakeven price to be roughly US$40 per barrel. That includes the 4.2% dividend, so management is actually being conservative by factoring that in.

With WTI oil prices hovering around US$50 per barrel, it seems as if the company has a bit of a cushion, but it doesn’t. Canadian production typically sells at a sizable discount. Western Canadian Select prices, for example, are just US$40 per barrel.

This discount may widen as oil giants invest heavily throughout North America. Chevron, Royal Dutch Shell, and Exxon Mobil could be producing oil on the continent for as low as US$15 per barrel. That blows Canadian Natural’s breakeven price out of the water.

If competing supply hits such rock-bottom prices — a rising probability — oil sands producers like Canadian Natural could be left scrambling.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Ryan Vanzo has no position in any stocks mentioned.

More on Dividend Stocks

growing plant shoots on stacked coins
Dividend Stocks

5 Dividend Stocks to Buy With Yields Upwards of 5%

These five companies all earn tonnes of cash flow, making them some of the best long-term dividend stocks you can…

Read more »

funds, money, nest egg
Dividend Stocks

TFSA Investors: 3 Stocks to Start Building an Influx of Passive Income

A TFSA is the ideal registered account for passive income, as it doesn't weigh down your tax bill, and any…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

3 of the Safest Dividend Stocks in Canada

Royal Bank of Canada stock is one of the safest TSX dividend stocks to buy. So is CT REIT and…

Read more »

Growing plant shoots on coins
Dividend Stocks

1 of the Top Canadian Growth Stocks to Buy in February 2023

Many top Canadian growth stocks represent strong underlying businesses, healthy financials, and organic growth opportunities.

Read more »

stock research, analyze data
Dividend Stocks

Wherever the Market Goes, I’m Buying These 3 TSX Stocks

Here are three TSX stocks that could outperform irrespective of the market direction.

Read more »

woman data analyze
Dividend Stocks

1 Oversold Dividend Stock (Yielding 6.5%) to Buy This Month

Here's why SmartCentres REIT (TSX:SRU.UN) is one top dividend stock that long-term investors should consider in this current market.

Read more »

IMAGE OF A NOTEBOOK WITH TFSA WRITTEN ON IT
Dividend Stocks

Better TFSA Buy: Enbridge Stock or Bank of Nova Scotia

Enbridge and Bank of Nova Scotia offer high yields for TFSA investors seeking passive income. Is one stock now undervalued?

Read more »

Golden crown on a red velvet background
Dividend Stocks

2 Top Stocks Just Became Canadian Dividend Aristocrats

These two top Canadian Dividend Aristocrats stocks are reliable companies with impressive long-term growth potential.

Read more »