JP Morgan Cuts Canadian Natural Resources, Says It Has No 2016 Hedges In Place

• Shares of Canadian Natural Resource Ltd. (USA) CNQ have declined more than 37 percent year-to-date, falling a little over 11 percent in the last five days.
• Phil Gresh of JP Morgan downgraded Canadian Natural Resource from Overweight to Neutral, maintaining the price target at C$36.
• Gresh believes that “balance sheet pressures could build in 2016 at a time when the company’s hedges are rolling off.”

Although the company continues to boast best-in-class sustained FCF yield, following the Horizon ramp, analyst Phil Gresh believes that the interim period could prove volatile.

“Further, without a downstream cushion, CNQ bears the brunt of the recent widening of light/heavy differentials,” the JP Morgan report stated.

It is possible that the company chooses to monetize its fee-based lands to bolster its balance sheet, although this would come at the expense of losing its stable FCF.

According to the report, the company has done well on controlling operating costs, while aggressively cutting down on capital cost in 2015. However, Canadian Natural Resource will need capital for the Horizon ramp in 2016, which Gresh expects to be higher than that in 2015.

This would mean that the company would face challenges to cutting capex and would likely see an impact on production, which is expected to decline in 2016.

“CNQ heads into 2016 with minimal oil price/differentials protection,” Gresh said, adding that as of the reported Q2 earnings, Canadian Natural Resource’s oil hedges “fully roll off in 2016.”

“While some of this could be temporary, it still highlights the risk of an unhedged upstream position without a downstream cushion,” the report added.

In addition, Gresh believes that the 2016 consensus earnings expectations appear too high, even at a higher oil price curve than the present.