Where is CNQ headed?
Oil has been in a downtrend lately, but CNQ stock has broken away from that trend. Where do you expect it to go?
Canadian Natural Resources (CNQ 0.00%↑) appears to be a buying opportunity at these levels, but there are several factors to consider.
CNQ's stock price typically mirrors the trends in oil prices. This correlation exists because CNQ is deeply entrenched in the oil and gas sector, deriving a substantial part of its revenue from oil production. As oil prices increase, CNQ usually sees a boost in its revenues and profits, which can lead to an uptick in its stock price. On the flip side, a drop in oil prices can result in a decrease in CNQ's stock value.
Oil prices are affected by numerous factors. However, why are oil prices currently low and predicted to fall even more?
Here are some reasons for this bearish sentiment:
Low productivity across the world, especially in Canada, Europe, and China.
Fear of recessionary impacts.
Less geopolitical tension (yes, oil does better in times of wars and sanctions).
Drill, baby, drill policies by the Trump administration.
OPEC’s reluctance to cut oil production.
From a technical perspective, CNQ has been trading within the channel indicated in the image below. It consistently tests the lower level (support), and the more it does so, the higher the probability it may break to the downside. Also, notice the tendency to track the oil chart? Recently, while oil prices have fallen, CNQ has significantly outperformed it. This divergence is uncommon and might adjust soon.
Remember when Warren Buffett made a huge investment in Occidental Petroleum OXY 0.00%↑ starting in 2019? Berkshire Hathaway has consistently augmented its share in OXY, with notable acquisitions in 2022 and 2024. As of mid-2024, Berkshire Hathaway's ownership in the company has approached close to 29%.
Although the reasons are unclear, examining OXY’s stock chart reveals a close correlation with oil prices. Despite the varying dynamics due to diverse revenue streams among companies, this correlation is noteworthy.
CNQ might be somewhat overvalued at the moment. In the long term, this may not be significant, but it's beneficial to analyze these aspects and draw your own conclusions.
Take into account Verified Investing's1 forecast for oil prices, which suggests a potential drop to $35. This is merely a projection based on their analysis and trend lines. If this pattern does materialize, it could indicate an economic shock, leading to a substantial decline for oil companies with close correlations. Nevertheless, such a scenario could also present an extraordinary buying opportunity.
Conclusion
CNQ is considered favourable due to its competent management, robust balance sheet, low production costs, and substantial dividend flow.
Additionally, it boasts a diversified portfolio of revenue streams for hedging against oil alone. Below are the estimated percentages for each category:
Synthetic Crude Oil (SCO): 35%
Natural Gas: 25%
Bitumen (thermal oil): 20%
Crude Oil: 20%
I might decide to invest at some point, but not just yet. Others may do as they please.
Happy investing!