Canadian Natural to Beat Rivals’ Dividend Growth Prospect

Canadian Natural Resources Ltd. is playing catch-up on dividends.

The nation’s second-largest natural gas producer offers the greatest potential to boost shareholder returns compared with nine of Canada’s biggest oil and gas producers, according to Bloomberg forecasts. Over the next three years, the Calgary-based company is poised to increase its payout 35 percent, beating the 14 percent estimated for Suncor Energy Inc. and 3.9 percent for Imperial Oil Ltd. Canadian Natural raised its quarterly dividend today by 13 percent, to 22.5 cents a share.

Canadian Natural is counting on last month’s $2.86 billion purchase of mainly gas assets from Devon Energy Corp. to drive cash flow after a winter deep freeze across North America helped send prices for the fuel to a five-year high. Lower capital spending on projects such as the Horizon oil-sands will also provide ammunition for dividends, said John Stephenson, who helps oversee about C$3 billion ($2.7 billion) in assets at First Asset Investment Management Inc. in Toronto.

“They have appreciably more potential” than other Canadian oil and gas companies to boost the dividend in the coming years, Stephenson said. “As their projects get going and revenue ramps up, you’ve got much more ability to pay or raise dividends.”

Both Suncor and Canadian Natural were the only Canadian companies among the 20 largest global oil and gas producers, including Hess Corp. and Gazprom OAO, to record net dividend growth of more than 11 percent over the past year, according to data compiled by Bloomberg.

Canadian Natural declined to comment on its dividend policy when contacted by Bloomberg News. The company’s dividend yield is now 2.2 percent.

Periodic Review

“The dividend policy of the company undergoes a periodic review by the board of directors and is subject to change at any time depending upon the earnings of the company, its financial requirements and other factors existing at the time,” the company said on its website.

Canadian Natural reported 2013 and fourth-quarter results today. Adjusted earnings per share rose to 52 cents a share, trailing the 53 cent average estimate of 12 analysts surveyed by Bloomberg. Cash from operations climbed to C$1.78 billion.

The company’s shares gained 11 percent in the fourth quarter, outperforming all other large Canadian oil and gas producers except Husky Energy Inc. Canadian Natural has 19 buy recommendations from analysts, while four advise holding the stock and one says sell.

Cash Flow

Prices for natural gas this summer may be the catalyst for dividend growth, said Todd Kepler, an analyst at Cormark Securities Inc. in Calgary, who has a buy rating on the shares. “If Canadian prices are north of $4, it gives them a cash flow boost,” he said.

Natural gas for April delivery fell 14.4 cents to settle at $4.523 per million British thermal units in New York yesterday.

The company has already had a boost from higher gas futures over the past several months as cold weather in many parts of North America helped boost demand for the heating fuel. Prices last month advanced to a five-year high.

“The natural gas market came roaring back in the fourth quarter,” wrote Macquarie Capital Markets analysts Chris Feltin and Brian Bagnell in a Jan. 16 note.

Cold weather in parts of North America continued into early March, with a weather system bringing ice and snow across the Tennessee and Ohio valleys and shifting toward the East Coast, the National Weather Service said.

Broken Record

“The extremely cold temperatures continue like a broken record across the Northern Plains, Upper Midwest, and Great Lakes, which has been the case for much of the winter,” the National Weather Service said earlier this week on its website.

The cold weather may only be a short-term boost to prices. Natural gas consumption may fall to 69.6 billion cubic feet per day in the coming year from 70.7 billion in 2013 as utilities switch to cheaper fuels, according to estimates from the U.S. government’s Energy Information Administration. The EIA forecasts U.S. production of 71.4 billion cubic feet per day versus 70.4 billion in 2013.

Prices will remain in the $4 to $4.13 range this year and $4.28 in 2015, according to Bloomberg Industries analysts Vincent Piazza and Andrew Cosgrove.

Devon’s assets will add about C$75 million in cash flow for Canadian Natural this year. The sale, which Canadian Natural expects to close April 1, includes gross proved reserves of 272.2 million barrels of oil equivalent and six gas plants.

Free Cash

Canadian Natural operates in the North Sea, West Africa and North America, which includes the Horizon oil sands project in northern Alberta. The company will spend C$2.5 billion this year as part of an expansion of Horizon, which produced 111,959 barrels of oil a day in the third quarter.

Gas production at the company’s North American operations is focused on reserves in western Canada.

“Canadian Natural is starting to generate a lot of free cash flow and, in general, dividends are taking priority over share buybacks,” said Kepler at Cormark. “These guys are trying to play catch-up with Suncor.”

Encana Corp. is the largest Canadian gas producer.

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