Canadian Natural Resources

Canadian Natural raised its capital expenditure and production guidance to CAD 7.6 billion and 1,660 thousand barrels of oil equivalent/day, driven by M&A. Management also provided its view on a recent memorandum of understanding with the government that could unlock production growth for the basin.

Why it matters: The MOU is immensely important for producers with thermal in situ and oil sands assets like Canadian Natural Resources. The proposed project to be developed by the government would see a new greenfield pipeline connecting Alberta to the Pacific. Depending on the ultimate scale of the egress, and the firm's committed capacity on it, there are a few proposed opportunities. Jackfish can be realized more quickly and in stages. Mine expansions will require the better part of a decade, but that timeline can align neatly with the pipeline. If the pipeline comes online more quickly, Canadian Natural could scale up its higher-decline exploration and production activities.

The bottom line: We are increasing our fair value estimate to CAD 62/USD 44 per share from CAD 60/USD 43 after updating our model with the most recent results. Our base case does not include potential mining expansions, given the uncertainties surrounding the pipeline project. After the fair value estimate increase, we see shares as fairly valued, trading in 3-star territory. Our Narrow Moat, Standard Capital Allocation, and High Uncertainty Ratings are unchanged.

Key stats: Buybacks accelerated in the quarter to CAD 1.1 billion, with another CAD 470 million retired so far in the third quarter. This is consistent with the shareholder return plan as commodity prices buoy the firm's cash generation. We expect the firm to reach its CAD 13 billion net debt target, which unlocks further shareholder returns, by the end of 2027.

We raise our fair value estimate to CAD 62 per share from CAD 60 after incorporating the most recent results and refreshing our model.

We assume oil (West Texas Intermediate) prices in 2026 and 2027 will average USD 81 and USD 72 per barrel, respectively. In the same periods, natural gas (Henry Hub) prices are expected to average USD 3.10 and USD 3.49 per thousand cubic feet. Terminal prices are defined by our long-term midcycle price estimates (currently USD 65/bbl Brent, USD 60/bbl WTI, and USD 3.70/mcf natural gas).

Our fair value estimate corresponds to enterprise value/EBITDA multiples of 5.6 times and 7.0 times for 2026 and 2027, respectively. Our production forecast for 2026 is 1,653 thousand barrels of oil equivalent per day, in line with guidance from management. That drives 2026 EBITDA to CAD 26.4 billion. We expect free cash flow to reach CAD 13.6 billion in the same period. Our 2027 estimates for production, EBITDA, and free cash flow are approximately 1,669 mboe/d, CAD 20.9 billion, and CAD 12.2 billion, respectively.

Canadian Natural Resources earns a narrow Morningstar Economic Moat Rating due to its cost-advantaged resources. Historically, the firm has struggled to return its cost of capital, leading to a no-moat rating under previous coverage. Infrastructure constraints, weak realized prices, and stiff competition with US shale eroded any advantage that quality acreage provided.

The industry has suffered from dual issues that weighed on Canadian producers: pipeline constraints and wide differentials. Since Alberta has little need for the quantities produced, oil and gas must be transported long distances via pipelines and railways. When pipeline capacity is reached, producers must store and hope the capacity constraints ease in the future or use railways. Both are much more expensive. Pipeline infrastructure is primarily directed toward the US, or eastern Canada via the US. Also, Canadian crude tends to be heavy, or full of impurities that make it more expensive to transport and refine. As a result, refiners demand a discount to take the barrels. This all combines to suppress realized prices and elevate costs of transport and processing, impairing returns.

Pipeline capacity and destination diversity have materially improved, along with the political will to back expansions. However, high costs of development and pushback from regulatory, environmental, and Indigenous groups have made developers wary of seriously contemplating the prospect of new greenfield pipelines. The new government appears to be substantially more accommodative, but the same pushback remains. Further complicating matters, private developers would likely seek material government support or a backstop for cost overruns. Should these roadblocks be cleared, Canadian producers are eager for additional international access.

Oil sands mining and upgrading earns a narrow moat.

This segment operates with a high degree of operating leverage, owing to the unique nature of extraction and processing. Extraction is essentially a surface mine rather than a well, where bitumen is extracted and moved to central processing facilities. Deposits are close to the surface, further improving costs. Unlike traditional E&P operations, mining and upgrading includes what is essentially a pre-refining process to upgrade extracted bitumen into synthetic crude oil. The resulting synthetic crude is light and sweet, suitable for most refineries, pipelines, and export.

Given the infrastructure required, the higher utilization achieved by the facilities, the greater returns produced. Mining and upgrading operations have regularly achieved more than 100% utilization, greatly improving returns for the segment. Aggressive efficiency programs have resulted in better performance.

The segment is less challenged by differential headwinds because of the type of oil produced. West Texas Intermediate and synthetic crude are comparable in quality, substantially narrowing the discount. As a result, evidence of the segment’s moat emerged in 2018, driven by a multiyear drop in per barrel production costs, increased volumes, and a rebound in oil prices.

Remaining inventory for the segment is multidecade, estimated to be 40 years or more based on 2025 production. Rystad similarly estimated the breakeven Brent price for Canadian Natural’s proven oil sands resource at USD 46 per barrel in 2025, well below our USD 65 per barrel Brent midcycle outlook. As a result, we can have high confidence in returns being maintained over a narrow moat horizon.

The segment could receive up to CAD 15 billion in additional investment to expand bitumen but not SCO production, as greenfield upgrader costs have swelled. Management has made regulatory certainty a precondition to conducting even initial development studies and will almost certainly need new greenfield pipelines in development to begin actual development.

Exploration and production earns a narrow moat.

This segment holds an eclectic collection of assets, including offshore North Sea and African production. Principally, it focuses on the production of oil and gas in Alberta and parts of British Columbia. This takes the form of conventional drilling and thermal in situ production methods.

The E&P segment has suffered substantially from weak Western Canadian Select pricing relative to WTI and infrastructure constraints. Heavy oils make up the largest portion of liquids production, making the segment highly exposed to the spread. Trans Mountain is largely credited with a structural narrowing in differentials, providing producers greater exposure to global pricing. With the improved differentials from greater pipeline capacity and more destinations, we expect excess returns.

As shale production matures, investors and international producers are looking at Canadian fields for their depth of inventory and low breakevens.

Multiple reserve types enable the firm to invest flexibly to realize the greatest value.

The Trans Mountain pipeline expansion has materially improved differentials for heavy crude by boosting access to global markets.

Canadian production faces many competitive pressures and barriers.

Pipeline capacity will constrain growth as greenfield investment looks unlikely.

Carbon taxes remain a major uncertainty that could derail new investment and investor interest.