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The energy sector is moving up after the recent pullback and more gains should be on the way by 2022.
Outlook for the oil market for 2022
Brent crude recently hit $ 80 a barrel while West Texas Intermediate (WTI) is trading near $ 75. These are very profitable prices for oil producers and the market is just beginning to find out that many of the Canadian energy companies are still trading at very cheap prices. The oil price has more than doubled compared to October last year. When demand increases, there is a possibility that the increases in supply will not be able to keep up to maintain a balanced market.
Most of the excess reserves for 2020 have already been used. Across the industry, major manufacturers cut their capital investments by tens of billions of dollars over the past year to protect their liquidity positions. The pressure to meet the climate and ESG goals is likely to result in very few new large manufacturing facilities being built in the next few years.
At the same time, fuel demand could rise well above expectations as air traffic recovers and millions of commuters choose to drive to work instead of using overcrowded public transit.
The oil bulls are calling for a rise to $ 100 a barrel over the next two or three years. Some bets are even placed on oil reaching $ 200 a barrel. At that price, economic recovery would likely stall and depress oil demand, but even a gradual increase to $ 90 a barrel over the next few years would mean cash flow gains for oil producers and their investors.
Oil companies are already making solid profits at current prices, and that should translate into higher dividends in 2022 and beyond. Let’s take a look at a Canadian oil and gas giant that deserves to be on your radar right now.
Canadian natural resources
Canadian natural resources (TSX: CNQ) (NYSE: CNQ) is a great energy stock to own if you want to participate in the entire hydrocarbon market. CNRL operates production facilities for oil sands, conventional heavy oil, conventional light oil, offshore oil, natural gas and liquid gas. The company owns a huge undeveloped land base with extensive resources and tends to own 100% of its assets rather than partnering with other companies. This strategy increases the risks, but also gives CNRL the flexibility to quickly reallocate capital in the portfolio in order to benefit from profitable fluctuations in energy prices.
The natural gas business is not that well known to investors, but it is a huge part of CNRL’s revenue stream and provides a good balance when oil prices get into a tough spot. This was the case last year when the price of oil rose. CNRL kept its dividend in 2020 when other companies cut dividends and then increased the dividend by 11% in 2021. The current distribution offers a return of 4%.
The company is well on its way to generating more than $ 7 billion in free cash flow (FCF) in 2021. If oil and gas prices stay at their current levels, the FCF number will be even higher next year. CNRL uses excess cash to reduce debt and buy back shares. Investors should see another big dividend hike in 2022.
The bottom line
CNRL has seen a nice rally from 2020 lows, but it still looks cheap considering natural gas is trading at a seven-year high and oil looks like it will hold or extend profits through 2021 through next year. If you’re an energy bull, CNQ stock deserves to be on your buy list.