CANADIAN NATURAL RESOURCES CNQ. S
August 24, 2015 - 8:21am EST by
Drew770a
2015 2016
Price: 20.36 EPS .33 0
Shares Out. (in M): 1,095 P/E 82 0
Market Cap (in $M): 22,200 P/FCF 0 0
Net Debt (in $M): 12,750 EBIT 1,750 0
TEV ($): 34,950 TEV/EBIT 13.3 0
Borrow Cost: General Collateral

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Description

We are recommending a short in CNQ (US or Canadian shares).   We are focusing on Canadian oil sand shorts currently for the following reasons:

1) In any graph you see of marginal production costs, the Canadian oil sand players are usually much higher than competing technologies

2) The oil market is in a state of oversupply, and will likely remain this way for quite a while.  For instance, the forward curve for WTI oil doesn't show the price hitting $60 again untile 2024! (more about htis below)

3) The market price of the equities still hasn't reflected the change in oil prices

 

The basic economics of oil sands:

1) Low $30's cash cost to get what has already been developed out of the ground

2) Maybe $5 SG&A

3) $15 shipping (or is also reflected on avg of Western Canadian oil trading at a $15 discount to WTI)

 

So, currently WTI is trading for less than $40 / barrel, and Western Canadian oil is trading for $25 / barrel.  Every barrel of oil the oil sands producers make ends up costing them over $10!

Assuming the spread between WTI and WCS holds relatively constant, WTI would need to approach $55 for oil sand producers to be cash flow breakeven.... Which isn't expected until 2019/2010 on the forward curve.

This is clearly unsustainable economics for the oil sands region.  Even when WTI was $80+, the oil sands producers were not faring well.  At $40 they will have to shutter capacity and many will go bankrupt.  We picked CNQ for this write-up because its big, liquid, and 80-90% of its NAV (by sellside estimates) is related to oil sands / heavy oil. 

Our target price is $5/share as we zero out the value of the oil sands operations.  However, given weakness across the oil chain (i.e. still has significant assets in the North Sea) + nearly $13bn in debt + envirnomental liabilities + cash drag from current operations / winding them down, there could be further downside.

The brightside of this (for the oil markets) is that once oil sands production starts getting shut in, it may help to balance the oil markets (and other players should rally).

The major risk is oil price rebounds significantly from here.

Note: We are short and may cover at any time

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

1. No rebound in oil prices (or continue to fall)

2.  Production shut-ins announced

3. Sell/buyside analysts start signficantly writing down value of oil sands assets

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    Description

    We are recommending a short in CNQ (US or Canadian shares).   We are focusing on Canadian oil sand shorts currently for the following reasons:

    1) In any graph you see of marginal production costs, the Canadian oil sand players are usually much higher than competing technologies

    2) The oil market is in a state of oversupply, and will likely remain this way for quite a while.  For instance, the forward curve for WTI oil doesn't show the price hitting $60 again untile 2024! (more about htis below)

    3) The market price of the equities still hasn't reflected the change in oil prices

     

    The basic economics of oil sands:

    1) Low $30's cash cost to get what has already been developed out of the ground

    2) Maybe $5 SG&A

    3) $15 shipping (or is also reflected on avg of Western Canadian oil trading at a $15 discount to WTI)

     

    So, currently WTI is trading for less than $40 / barrel, and Western Canadian oil is trading for $25 / barrel.  Every barrel of oil the oil sands producers make ends up costing them over $10!

    Assuming the spread between WTI and WCS holds relatively constant, WTI would need to approach $55 for oil sand producers to be cash flow breakeven.... Which isn't expected until 2019/2010 on the forward curve.

    This is clearly unsustainable economics for the oil sands region.  Even when WTI was $80+, the oil sands producers were not faring well.  At $40 they will have to shutter capacity and many will go bankrupt.  We picked CNQ for this write-up because its big, liquid, and 80-90% of its NAV (by sellside estimates) is related to oil sands / heavy oil. 

    Our target price is $5/share as we zero out the value of the oil sands operations.  However, given weakness across the oil chain (i.e. still has significant assets in the North Sea) + nearly $13bn in debt + envirnomental liabilities + cash drag from current operations / winding them down, there could be further downside.

    The brightside of this (for the oil markets) is that once oil sands production starts getting shut in, it may help to balance the oil markets (and other players should rally).

    The major risk is oil price rebounds significantly from here.

    Note: We are short and may cover at any time

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise do not hold a material investment in the issuer's securities.

    Catalyst

    1. No rebound in oil prices (or continue to fall)

    2.  Production shut-ins announced

    3. Sell/buyside analysts start signficantly writing down value of oil sands assets

    Messages


    SubjectHow much staying power do they have?
    Entry08/24/2015 12:16 PM
    Membersnarfy

    When does the clock strike zero on these guys?

    Are there any oil sands dominos that would fall before CNQ?

    Thanks


    SubjectRe: Re: How much staying power do they have?
    Entry08/24/2015 01:00 PM
    MemberDrew770a

    on the current curve, the lose close over $1/share next year (EPS) and $4bn+ in negative CFO-capex-dividends.  So, they should cut the dividend (i.e. $1bn in cash saved, but won't be good for the stock) and can maybe cut $2bn in capex (though that would likely be below DD&A, but should be fine with them as aren't making a cash return), to -$1bn in cash flow.  

    Can that be sustainable for a while, maybe, assuming the credit markets let them keep going with hopes for a rebound in oil.  But once they cut the dividend (a more near term catalyst), stock should react negatively.

    You can short all the names, SU has more refining operations, but still big at risk. I'd also through MEG into the bucket


    SubjectRe: Re: Re: How much staying power do they have?
    Entry08/24/2015 01:58 PM
    MemberAkritai

    Great idea! I totally agree regarding the oil sands, these plays are def not economic at the current prices. It's also a horrible business, the diffs aren't fun to manage and there's always an operational issue. 

    My concern w/ shorting these names is the large ones have decent balance sheets and the small ones have already hit the wall (Connacher, STP, Sun Shine, etc...). There's no hard catalyst for the short, other than a dividend cut & oil going lower. It's hard to say how much of this is priced in. A similar story can be made for a few of the large oil names (i.e. COP and such), and you are really playing a short on the underlying commodity.  

     


    Subjectdifferential
    Entry08/24/2015 02:08 PM
    Memberurban

    Drew, thanks for the writeup, do you think Keystone XL gets approved and how does that affect transport costs? Also what other factors drive the light/heavy differential? Thanks


    SubjectRe: differential
    Entry08/24/2015 03:06 PM
    MemberDrew770a

    The Keystone definitely isn't going to get approved while Obama is president, and so is a minimum 5 years away.  Once its built, maybe differentials drop $5. It overall is a lower quality / harder to handle product, so it will remain discounted, esp when there is so much light shale oil available


    SubjectBonds
    Entry08/24/2015 03:35 PM
    Memberjso1123

    Any thoughts on the bonds?


    SubjectRe: Bonds
    Entry08/24/2015 03:49 PM
    MemberDrew770a

    YTW on the 10 year bond is less than 5% - so not attractive to me at all.  If you can short the debt / but CDS, seems like a good risk / return


    SubjectRe: Re: Bonds
    Entry08/24/2015 04:53 PM
    Memberjso1123

    Thanks - was talking about shorting the debt


    Subjectupdate?
    Entry11/09/2015 05:38 PM
    MemberCoyote05

    agree with thesis.  could you please provide an update: 3q results, PSK deal, oil sands m&a?

    thank you,

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