Canadian Natural Resources (TSE:CNQ) is Well-Positioned to Manage its Debt Successfully

Canadian Natural Resources (TSE:CNQ) is Well-Positioned to Manage its Debt Successfully Renowned investor David Iben emphasizes that "volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital." Considering this perspective, it becomes evident that debt plays a crucial role in evaluating a company's risk. Canadian Natural Resources Limited (TSE:CNQ) utilizes debt, prompting the need to analyze whether this indebtedness poses a significant concern for shareholders.

Understanding the Risk Associated with Debt Debt becomes a concern when a company faces challenges in repaying it, either through new capital or free cash flow. In extreme cases, excessive debt can lead to bankruptcy, with shareholders experiencing permanent losses. On the flip side, companies adept at managing their debt can utilize it to their advantage. When evaluating debt levels, considering both cash and debt on hand is essential.

Canadian Natural Resources' Debt Overview As of September 2023, Canadian Natural Resources, a TSX oil and gas share, reported a total debt of CA$11.6 billion, reflecting a decrease from CA$12.9 billion the previous year.

Factoring in its cash reserve of CA$690.0 million, the net debt is approximately CA$11.0 billion.

Balancing the Scales: Analyzing the Balance Sheet A closer look at the balance sheet reveals that Canadian Natural Resources faced liabilities of CA$8.25 billion due within a year and CA$28.4 billion due beyond that. Counteracting these obligations, the company held CA$690.0 million in cash and CA$4.22 billion in receivables due within 12 months. Despite a CA$31.8 billion deficit, Canadian Natural Resources, valued at CA$99.3 billion, possesses the potential to raise capital if needed.

Debt Metrics: A Closer Examination Measuring the debt load relative to earnings is crucial, involving the net debt to EBITDA ratio and interest cover. Canadian Natural Resources exhibits a low net debt to EBITDA ratio of 0.67, with an EBIT that covers its interest expense 14.7 times. Despite a 49% decline in EBIT over the past twelve months, the company's conservative use of debt remains a saving grace.

Cash Flow Strength: A Critical Factor While accounting profits may attract tax benefits, lenders prioritize actual cash flow.

Examining the proportion of EBIT matched by free cash flow over the last three years reveals that Canadian Natural Resources recorded free cash flow equivalent to 89% of its EBIT. This robust cash flow position positions the company favorably for debt repayment.

Final Assessment: Managing Debt Effectively Canadian Natural Resources faces challenges, particularly in EBIT growth, but its strong interest cover and effective management of debt instill optimism. The company's ability to generate substantial free cash flow further supports its capacity to address debt obligations. While caution is advised due to the high debt levels, ongoing monitoring remains justified.