When we introduced The Value Meter last June, the very first company I evaluated was oil producer Canadian Natural Resources (NYSE: CNQ).

In case you’re new to Wealthy Retirement, every Friday in my Value Meter column, I evaluate an individual stock to determine whether it’s trading at an attractive valuation.

Based on the company’s incredible free cash flow yield of 25%, I concluded last year that Canadian Natural was extremely undervalued.

The stock has performed well since then, rising 24%, while the S&P 500 has gone up just 17%.

Despite that strong stock price performance, I think Canadian Natural shares continue to offer excellent value.

This company is a cash-generating juggernaut, and the key to its cash generation is the quality of the assets it controls.

Canadian Natural is sitting on an absurdly large amount of oil. The company’s reserves are in excess of 10 billion barrels of oil equivalent.

That’s enough to cover its production for the next 32 years!

Thanks to this huge reserve base, Canadian Natural doesn’t need to spend money exploring for new reserves every year.

And less spending on exploration means more cash flow available for shareholders.

Another thing I love about Canadian Natural is that its oil reserves aren’t just massive… they’re high-quality. The company has an incredibly low decline rate of only 10%.

That’s another reason the company has to spend very little on developing new production each year – which, again, leads to greater free cash flow.

And Canadian Natural has been putting that free cash flow to good use.

Since the start of 2021, the company has used its excess cash to pay down a massive amount of debt.

In that time, its total long-term debt has decreased from $16.3 billion to $9.2 billion.

Canadian Natural has also repeatedly repurchased shares at attractive prices.

Over that same time frame, its share count has dropped by more than 7%.

But that’s not all. In addition to massively reducing its debt and its share count, Canadian Natural has also been steadily increasing the dividend it pays to shareholders.

The company has raised its base dividend for 23 consecutive years!

And its current yield is in excess of 4%.

Debt reduction, share buybacks and an increasing dividend…

These are the hallmarks of a company that is producing a prodigious amount of free cash flow.

Yet here is the most exciting thing for investors: Canadian Natural is nearing a milestone that will cause the amount of money it spends on dividends and share repurchases to increase significantly.

Management has been operating under a policy of using 50% of free cash flow to reduce debt and the other 50% to pay dividends and repurchase shares.

But once Canadian Natural’s total net debt is reduced to less than CA$10 billion, all free cash flow is going to be directed to dividends and shareholders. (Note that net debt is not the same as long-term debt, which was shown in the chart above.)

I estimate that the company will hit this CA$10 billion goal in 2024.

Last year, the company spent CA$9.25 per share on dividends and repurchases and CA$5.00 per share on debt reduction.

That adds up to CA$14.25 per share that will be fully returned to shareholders through dividends and repurchases.

Based on Canadian Natural’s share price of CA$83 as I write, that equates to an incredible 17% total return to shareholders.

The only caveat here is that we need to keep an eye on oil prices. As long as the price of West Texas Intermediate crude oil is $70 or higher, I believe Canadian Natural shares are very attractive at current levels.

With oil currently priced at over $80 per barrel, The Value Meter rates Canadian Natural Resources shares as being “Extremely Undervalued.”

If you are at all bullish about oil prices going forward, then this is a stock for you!

— Jody Chudley

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Source: Wealthy Retirement