Canadian Natural Resources Limited CNQ is one of the largest independent energy companies in Canada, engaged in the exploration, development and production of oil and natural gas. However, its performance this year has been relatively modest with a 1.3% gain year to date (YTD). This places CNQ behind the broader oil and energy sector, which has grown 8.7%, and its sub-industry, which has risen 4.7%.

Compared with its peers within the Canadian Oil and Gas Exploration and Production sub-industry, CNQ has underperformed significantly. Notably, shares of Imperial Oil Limited (IMO) and ARC Resources Ltd. (AETUF) have risen 24.7% and 18.9%, respectively. As a result, many investors are left to evaluate whether it would be prudent to buy CNQ stock at present or wait for a better entry point.

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CNQ makes money by finding and producing oil and gas, which it sells to other companies. It also owns pipelines to move the oil and gas around. The company has a varied range of products, including heavy and light crude oil, natural gas, bitumen and synthetic-crude oil. CNQ’s core operations are focused in Western Canada, the United Kingdom sector of the North Sea and offshore Africa, which includes Côte d’Ivoire, Gabon and South Africa.

Let us take a closer look at what CNQ brings to the table, the risks it is facing and whether it is the right time to invest.

What Is Favoring CNQ Stock?

Impressive Financial Performance: CNQ continues to post strong financial results with third-quarter 2024 adjusted funds flow of C$3.9 billion and net earnings of C$2.1 billion. These numbers underline the company’s ability to generate significant cash flow, even in challenging commodity price environments. Such financial resilience makes it a strong contender for long-term investments.

Strong Dividends and Shareholder Returns: The company’s 7% dividend increase for 2025 marks its 25th consecutive year of dividend growth with an impressive compound annual growth rate of 21%. CNQ also returned C$1.9 billion to its shareholders in the third quarter through dividends and share buybacks, proving the company’s dedication to enhancing its shareholder value.

Strategic Growth Through Acquisitions: CNQ’s acquisition of Chevron’s CVX interests in the Athabasca Oil Sands Project and Duvernay play will add 122,500 barrels of daily production by 2025. These assets not only diversify CNQ’s portfolio but also enhance its ability to generate sustainable free cash flow, even during downturns.

Diversified and Resilient Asset Base: With long-life, low-decline assets like oil-sands mining, thermal in situ operations and Pelican Lake, CNQ ensures stability in cash flows. Moreover, the company’s balanced mix of crude oil, natural gas and synthetic-crude oil shields it from over-reliance on a single commodity, providing flexibility across market cycles.

Strong financials, strategic-growth initiatives and a diverse asset base have all contributed to CNQ's reputation as a reliable player in the energy sector. However, there are a few challenges and risks that potential investors should carefully consider.

Red Flags for Canadian Natural

Declining Production in Certain Segments: While overall production is strong, specific segments like North America’s natural gas and Pelican Lake heavy crude oil have shown declines. Natural gas production fell 5% year over year in third-quarter 2024, due to deferred developments and natural field declines. Pelican Lake production dipped 4% year over year, due to higher maintenance activities.

Valuation Concerns: CNQ currently has a P/E ratio of 14.61, which is above the sub-industry’s average of 13.4 for Canadian Oil and Gas Exploration and Production companies. This could mean the stock is getting overpriced. If the company’s earnings don’t grow as expected, the stock could lose value.

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Capital-Intensive Growth: Acquiring CVX’s assets and executing other large-scale projects require significant capital outlay. While these investments are expected to yield long-term benefits, CNQ could strain its resources if market conditions deteriorate or costs overrun.

Operational Risks: CNQ has faced challenges such as temporary processing outages and rail transportation restrictions, which impacted production volumes. Additionally, reliance on large projects like the Scotford Upgrader and Horizon could pose risks if maintenance or performance issues arise.

Verdict for CNQ Stock   

Given CNQ’s consistent financial performance, strategic growth plans and a strong commitment to returning capital to its shareholders, the stock remains a solid long-term investment choice for those seeking stability and dividend income. However, the company’s year-to-date underperformance compared with its peers, along with concerns about valuation and declining production in certain segments, means that investors should be cautious.  

With a P/E ratio above the industry average and no major signs of significant growth in the near term, some investors may want to hold off on buying CNQ stock at current levels. Given this mix of strengths and potential challenges, investors should wait for a more opportune entry point instead of adding this Zacks Rank #3 (Hold) company to their portfolios. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Chevron Corporation (CVX) : Free Stock Analysis Report

Imperial Oil Limited (IMO) : Free Stock Analysis Report

Canadian Natural Resources Limited (CNQ) : Free Stock Analysis Report

Arc Resources Ltd. (AETUF) : Free Stock Analysis Report

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