Last year, one of the world’s largest money managers tipped its hand on what’s now a $20-billion bet on Canadian Natural Resources Ltd CNQ-T.
In a report for institutional clients published in February, 2023, Los Angeles-based Capital Group explained the logic for boosting investments in energy in general and the Alberta oil sands in particular. Reading between the lines, the report is a love letter to Murray Edwards, the guiding light at Canadian Natural Resources.
Capital Group, which oversees US$2.2-trillion in assets, woke up to what Mr. Edwards, Canadian Natural executive chairman, recognized more than 30 years ago: Long-life oil sands properties kick off so much cash they can meet, or exceed, the expectations of investors, lenders and climate-change advocates.
Capital Group is by far the largest shareholder in Canadian Natural, with a 19-per-cent holding in one of the country’s largest energy companies. (Mr. Edwards owns a $2.1-billion stake.) On Monday alone, the fund manager made roughly $600-million on the position, as Canadian National’s stock price jumped 3.3 per cent on news it will acquire Chevron Corp.’s Alberta assets for US$6.5-billion.
Canadian National snapped up Chevron’s 20-per-cent interest in the Athabasca oil sands project, which includes the Quest carbon capture and storage facility, along with a 70-per-cent stake in shale oil properties in the Duvernay region. Houston-based Chevron exited Alberta to raise the cash needed to pay for its proposed US$53-billion takeover of Hess Corp.
Mr. Edwards and the team at Canadian National – which operates without a CEO – have built a company with a $105-billion market capitalization by consistently buying properties from U.S. peers quitting Alberta for a perceived brighter future in other parts of the world. Along with bidding for Hess, Chevron is developing massive projects in Kazakhstan.
Fund managers like Capital Group take massive positions in companies like Canadian Natural because they see a business built to outperform on all fronts, from financial results to cutting carbon emissions.
Eighteen months before the Chevron acquisition, Capital Group analysts Craig Beacock and Darren Peers pointed out many large energy companies had pivoted from focusing almost entirely on growth to a strategy of boosting dividends and being wise stewards of capital.
“This has been one of the most pronounced changes we’ve seen in our lifetime,” said the Capital Group team. “Record-breaking cash flow over the last 12 months has left oil producers with some of the strongest balance sheets in history.”
Prior to buying the Chevron assets, Canadian Natural’s debts were so low the company had committed 100 per cent of its free cash flow – roughly $4-billion this year – to shareholder-friendly dividend hikes and stock buybacks.
On Monday, Canadian Natural borrowed $4-billion from a syndicate led by Bank of Nova Scotia and Royal Bank of Canada to fund the Chevron acquisition. Even while it pays down its new loans, Canadian Natural will continue to earmark an impressive 60 per cent of its free cash flow to shareholders. Once debt falls to less than $12-billion, free cash will again all go to investors.
As a sign it sees the Chevron properties making an immediate contribution to its cash flow, Calgary-based Canadian Natural boosted its common share dividend by 7 per cent on Monday, the 25th consecutive year it has hiked the payout.
Along with recognizing a shareholder-friendly approach to cash at oil companies such as Canadian Natural, the Capital Group team recommended overweighting oil sands stocks because they were cheap compared to U.S. peers. Mr. Beacock and Mr. Peers said many investors held an outdated view of oil sands operators as high-cost producers and explained: “The long-life, low-decline nature of these assets means the capital intensity required to maintain operations is comparatively low versus U.S. peers.”
When it came to dealing with climate change, Capital Group, a global fund manager, noted many European energy producers plan to replace fossil fuel businesses with low-carbon alternatives such as renewable energy, a relatively high-risk diversification strategy. However, North American oil companies have primarily focused on removing carbon from their existing businesses.
Canadian Natural is a founding member of the Pathways Alliance, along with four other major Canadian oil sands producers – Suncor Energy Inc., Cenovus Energy Inc., Imperial Oil Ltd. and MEG Energy Corp. – and Houston-based ConocoPhillips. The group, supported by a generous helping of taxpayer money, is making the multibillion-dollar investments in carbon capture and bitumen processing technology needed to achieve net-zero greenhouse gas emissions by 2050.
Lenders such as Scotiabank and RBC only make $4-billion loans to oil companies when they believe in management’s plans to both pay back the money and cut GHG emissions. Fund managers like Capital Group only commit their cash to energy stocks with credible financial and environmental strategies. They all trust Mr. Edwards.