This Oil Giant Is Quietly Becoming a 100% Cash Flow Machine

I don’t like so-called “FOMO trades,” which are basically investments with a lot of momentum that are often bought because they are doing so well. I prefer to buy equities that are unloved. It’s better for the risk/reward when done correctly, as obvious as that may sound. Right now, this certainly applies to energy, as that sector has gone up vertically due to the war in Iran that came after we saw the first signs of broadening economic growth. That explains why energy is having such a great year so far, as we can see below.  [Inline image] Source: GNG Research Nonetheless, it’s exactly a period like the current one that makes it important to show people the best energy stocks to buy, even if they end up on a watchlist before a better buying opportunity presents itself. I’m saying that because I see too many people buy the wrong energy stocks. Many get stuck focusing on issues like income, size, or simply buying stocks they know. For example, while I have nothing against Exxon Mobil (XOM) and Chevron (CVX), which are top-tier companies, I believe there’s a lot more value to be found beyond these giants.  One of these companies is Canadian Natural Resources (CNQ) , which has consistently beaten the Energy ETF (XLE), as the CNQ/XLE total return ratio below shows. [Inline image] Source: TradingView (CNQ/XLE Total Return Ratio) With an industry-leading cost structure, decades of low-decline inventory, and macro tailwinds, specifically the current tightening of global oil markets because of Middle East tensions, CNQ remains a top-tier vehicle for shareholder returns.  In this article, I’ll tell you why that is.  Understanding the Company: What is Canadian Natural Resources? Before we can start looking at the cash-flow mechanics that fund this company’s aggressive payouts, it is essential to understand what CNQ actually is and why its business model is so impressive.  For starters, Canadian Natural is not just another oil company, as it is the largest crude oil producer and the second-largest natural gas producer in Canada, generating roughly 1.62 million barrels of oil equivalent per day (BOE/d). [Inline image] Source: Canadian Natural Resources The company operates a massive, diversified, and highly balanced asset base that is systematically segmented into three primary pillars that are all important to understand (for various reasons): 1. Conventional E&P: This segment covers their premium light crude oil, liquids-rich natural gas, and primary heavy crude oil operations across North America and the North Sea. With roughly 25 million net acres, they hold decades of inventory. In fact, they have a reserve life index of more than 30 years, which they have held consistent for years due to new discoveries.  2. Thermal In Situ: These operations extract bitumen deep underground by using steam-assisted gravity drainage (“SAGD”) and cyclic steam stimulation (“CSS”). As complex as this may sound, what’s important to remember here is that these are highly capital-efficient operations with decades of reserve life and ultra-low decline rates. 3. Oil Sands Mining & Upgrading: This is the crown jewel of CNQ’s portfolio and my favorite asset as well. These world-class assets literally mine the oil sands and upgrade the raw bitumen into high-value Synthetic Crude Oil (“SCO”). For that, they use mining equipment like haul trucks. What makes this segment so incredibly valuable is that it possesses zero decline and zero reservoir risk. Basically, once a company has dealt with high upfront costs, mining operations are ultra-efficient (but also dirty).  As a result of this, roughly 56% of the company’s total production comes from long-life, low-decline assets. This also means they have an edge over American onshore producers that have to deal with high decline rates and dwindling Tier 1 reserves.  [Inline image] Source: Canadian Natural Resources Moreover, because