Canadian Natural Resources (TSX:CNQ) is near its 12-month high. Investors who missed the rally over the past few weeks are wondering if CNQ stock is still cheap and good to buy right now for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio.
The price of West Texas Intermediate (WTI) oil currently trades close to US$83 per barrel. That is nearly a 20% surge off the low in June. Oil traders who sold the commodity a few months ago are now buying futures on the hopes that the global economy will remain in solid shape, even as the central banks around the globe raise interest rates in their battle against high inflation. The United States Federal Reserve is expected to continue to keep interest rates elevated through at least the end of next year, unless there is a major economic shock.
High interest rates make life difficult for households and businesses that carry too much debt. Soaring loan payments can force companies to reduce investment. Higher mortgage costs siphon cash flow that homeowners would otherwise spend on new furniture, a new deck, or dinners at restaurants.
The central banks hope that rate hikes will slow down the economy and lead to a reduction in job vacancies or even push up unemployment. Energy traders are feeling good right now about the ability of the central banks to navigate a soft landing for the economy.
China is also on the radar of oil traders. The country is the planet’s largest consumer of oil, and shifts in the Chinese economy can trigger meaningful moves in oil prices. A property crisis is largely to blame for the weak recovery in the Chinese market after the government lifted the pandemic lockdowns. This contributed to weaker oil prices earlier this year. Unemployment among young Chinese citizens is high, so China might decide to use a new stimulus initiative to get the economy back on track.
Supply is the other part of the story. Saudi Arabia and its Organization of Petroleum Exporting Countries peers want to keep oil prices elevated and are maintaining reduced supply to the market. Production is rising at some locations around the globe, as companies ramp up output from existing infrastructure, but few large new development projects are expected as oil executives prefer to return cash to investors and are hesitant to put ESG (environmental, social, and governance) goals at risk. This might lead to a supply shortage down the road.
Canadian Natural Resources
CNRL is the largest oil and natural gas producer on the TSX, with a current market capitalization of nearly $95 billion. The company operates oil sands, conventional heavy oil, conventional light oil, offshore oil, natural gas liquids, and natural gas production sites.
CNRL tends to be the sole owner of most of its assets. This gives management the flexibility to quickly shift capital around the portfolio to take advantage of moves in energy prices. The company’s size and strong balance sheet enable CNRL to make strategic acquisitions at discounted prices when the market slumps and then reap the benefits on the next rebound.
CNRL used the cash windfall from the jump in oil and natural gas prices in 2021 and 2022 to reduce debt, buy back stock, and boost dividends. Investors even received a bonus dividend of $1.50 per share last August. The current quarterly payout is $0.90 per share and provides a 4% yield at the current share price. CNRL raised the dividend in each of the past 23 years. Investors have received a compound annual dividend-growth rate of better than 20% over that timeframe.
Investors who are bullish on oil and natural gas prices over the next 12-18 months should consider owning CNQ stock. The share price could continue to move higher from the current level, but I would probably wait for the next pullback to buy.
Other top TSX dividend stocks remain oversold and offer much higher yields today.
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* Returns as of 8/16/23
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The Motley Fool recommends Canadian Natural Resources. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker has no position in any stock mentioned.