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Canadian Natural Resources Ltd CNQ

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Canadian Oil Is Poised to Grow, Even Without the Keystone XL

Joe Gemino, CPA Senior Equity Analyst

Analyst Note

| Joe Gemino, CPA |

With oil prices on the rise, Canada's crude pipeline egress problem is resurfacing. Oil sands economics have proved to be resilient, and many existing projects can generate free cash flow at oil prices below $40 a barrel West Texas Intermediate, or WTI. Supply will soon be approaching precrisis levels, and Canada's oil industry will need new pipeline infrastructure to bring new crude to market and prevent heavy oil prices from crashing as they did in December 2018. With Joe Biden winning the U.S. presidential election, it is almost assured he will revoke the Keystone XL's presidential permit, shelving the project indefinitely. Fortunately for oil producers, we do not expect the same opposition to Enbridge's Line 3 replacement. Line 3, combined with the Canadian government's Trans Mountain expansion and modular capacity additions on existing pipelines, will create 1.1 million barrels of new pipeline capacity by the end of 2023. 
Additionally, oil sands producers can take advantage of favorable heavy oil pricing in the U.S. Gulf Coast. Refiners in the region are battling declining imports from Venezuela and Mexico, a trend we expect to continue. With the Keystone XL no longer the answer to the region's problems, prices are attractive enough to incentivize rail transportation as a supplement market option for oil sands producers. Accordingly, we expect Canadian supply to grow 6.3 million barrels of oil per day by 2030, increasing by 1 mmbbl/d over the next decade. 
We think the market is underestimating the growth prospects and the cash flow potential of the oil sands producers along with the midstream pipeline operators. Accordingly, we see pockets of undervalued stocks, which include wide-moat Enbridge, narrow-moat TC Energy, and Canadian Natural Resources. 

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Company Profile

Business Description

Canadian Natural Resources is one of the largest oil and natural gas producers in western Canada, supplemented by operations in the North Sea and Offshore Africa. The company’s portfolio includes light and medium oil, heavy oil, bitumen, synthetic oil, natural gas liquids, and natural gas. Production averaged 1.10 million barrels of oil equivalent per day in 2019, and the company estimates that it holds over 11.5 billion boe of proven and probable crude oil and natural gas reserves.

855 - 2nd Street S.W, Suite 2100
Calgary, AB, T2P 4J8, Canada
T +1 403 514-7605
Sector Energy
Industry Oil & Gas E&P
Most Recent Earnings Sep 30, 2020
Fiscal Year End Dec 31, 2020
Stock Type
Employees 10,180