Hillcrest Energy Technologies. (CSE: HEAT)
From concept to commercialization, Hillcrest is investing in the development of energy solutions that will power a more sustainable and electrified future.
Recently, Canadian Natural Resources (TSX: CNQ) announced that it has signed an agreement to acquire Chevron Canada Ltd.’s interests in the Athabasca Oil Sands Project and Duvernay shale for $6.5 billion. Over the past decade, the company has been consistently acquiring oil sands assets from foreign energy producers.
CNQ has long been the largest energy company in Canada and is one of the largest crude oil producers globally. President Scott Stauth stated in a conference call that these assets further strengthen Canadian Natural Resources’ asset base, solidifying the company’s leadership position in the Canadian oil and gas industry. Through the recently completed transaction, CNQ will gain an active production of 122,500 barrels per day and 1.44 billion barrels in reserves.
There is no doubt the company has grown larger, but whether these assets will deliver returns remains uncertain.
The newly acquired assets are expected to add approximately $9 million in marginal revenue per day for CNQ. Assuming the company produces oil for 300 days a year, this amounts to about $2.7 billion annually. Based on the company’s current profit margins, the additional profit would be approximately $551 million per year. However, there is a significant uncertainty regarding oil price trends over the coming years.
In recent years, oil demand has seen slight growth, while OPEC’s production cuts have restrained supply. These two factors have collectively contributed to relatively high oil prices over the past five years, especially compared to the previous five years. Although many countries are actively developing renewable energy and rebooting nuclear power projects, building nuclear power plants takes a substantial amount of time. Therefore, it seems likely that oil prices will remain relatively high over the next five years.
How high? Currently, WTI crude oil prices stand at $75. OPEC’s plans to increase production next year may lead to a slight decrease in prices, but oil prices are expected to remain between $60 and $75 over the next five years.
If this forecast holds true, Canadian Natural Resources would undoubtedly be a solid investment, generating considerable profits that are likely to continue growing over the next few years. The company currently has annual revenues of approximately $7.6 billion and free cash flow of $9.3 billion, not including the newly acquired Chevron assets. Additionally, CNQ’s stock valuation is reasonable, with a price-to-earnings ratio of 12 and a price-to-cash flow ratio of 7.
CNQ’s net profit margin stands at 21%, and its free cash flow margin is 24%. If oil prices remain between $60 and $75, the company should be able to maintain this level of profitability. Including the $6.5 billion acquisition of Chevron’s assets, next year’s profit is expected to be around $8 billion, with free cash flow of $10 billion. Based on this forecast, CNQ’s current forward price-to-earnings ratio is 10, and its forward price-to-cash flow ratio is 8.
