Long Life Oil Sands Reserves And Thermal Projects Will Support Stronger Future Performance

Catalysts

About Canadian Natural Resources

Canadian Natural Resources is a large oil and gas producer with a diverse mix of Oil Sands, thermal, primary heavy oil and natural gas assets.

What are the underlying business or industry changes driving this perspective?

• Record 2025 production of 1,571,000 BOEs per day, combined with accretive acquisitions and organic development across Oil Sands, thermal and liquids rich gas, points to a larger and more efficient production base that can support higher revenue and funds flow per share over time.
• High exposure to long life, low decline and zero decline assets, including Oil Sands mining and upgrading with a proved reserve life index of 39 years for SCO and mining bitumen, supports production stability that can help sustain margins and smooth earnings across cycles.
• Regulatory approval for the 70,000 barrel per day Pike 2 SAGD project, together with the 30,000 barrel per day Jackfish brownfield expansion and strong performance from the first Pike 1 pad, creates a visible queue of thermal growth projects that can add incremental volumes and support future cash flow growth.
• Ownership of 100% of the Albian mines and continued application of continuous improvement and cost reduction practices, with identified annual savings of about $30m to $40m, provides scope for further operating cost efficiencies that can support net margin expansion.
• Very large proved and proved plus probable reserves of 15.9b BOE and 20.75b BOE, with low FD&A costs of $3.64 per BOE and $2.42 per BOE, support a long runway for reinvestment at attractive finding costs that can underpin earnings and free cash flow generation over many years.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more optimistic perspective on Canadian Natural Resources compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Canadian Natural Resources's revenue will remain fairly flat over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 27.9% today to 20.8% in 3 years time.
• The bullish analysts expect earnings to reach CA$8.0 billion (and earnings per share of CA$3.94) by about March 2029, down from CA$10.8 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as CA$6.2 billion.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 23.3x on those 2029 earnings, up from 13.0x today. This future PE is greater than the current PE for the US Oil and Gas industry at 18.8x.
• The bullish analysts expect the number of shares outstanding to decline by 0.35% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.25%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The deferral of the approximately CA$8.25b Jackpine Mine expansion due to uncertainty around long term carbon pricing and methane regulations highlights that future growth projects may be delayed or cancelled. This could limit production growth potential and weigh on revenue and earnings over time.
• Heavy reliance on long life Oil Sands mining and upgrading, where new large scale projects are exposed to evolving environmental policy and approval timelines, could increase regulatory costs or restrict development. This could put pressure on operating costs, net margins and long term earnings.
• The company is increasing direct returns to shareholders through higher dividends and a larger free cash flow payout at net debt of CA$16b and CA$13b. This may reduce retained cash for reinvestment if commodity prices weaken, potentially constraining future production projects and affecting revenue and earnings growth.
• Large exposure to liquids rich gas and natural gas production in a market management describes as very tight and dependent on more LNG export capacity means that prolonged weak AECO pricing or slower than expected export project approvals could reduce cash flow from gas operations and pressure overall margins and earnings.
• The focus on maximizing utilization at Oil Sands upgraders, with recent rates such as 105% utilization and very high SCO output, may be hard to sustain over many years. Any reversion toward lower utilization or higher maintenance requirements could lift unit operating costs and reduce net margins and earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Canadian Natural Resources is CA$75.0, which represents up to two standard deviations above the consensus price target of CA$58.6. This valuation is based on what can be assumed as the expectations of Canadian Natural Resources's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$75.0, and the most bearish reporting a price target of just CA$47.0.
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be CA$38.3 billion, earnings will come to CA$8.0 billion, and it would be trading on a PE ratio of 23.3x, assuming you use a discount rate of 6.3%.
• Given the current share price of CA$67.39, the analyst price target of CA$75.0 is 10.1% higher. Despite analysts expecting the underlying business to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.