July 15, 2014

Canadian Natural Resources Ltd. Current Recommendation

NEUTRAL

Prior Recommendation

Underperform

Date of Last Change

06/30/2013

Current Price (07/14/14)

$45.19

Target Price

$47.00

(CNQ-NYSE)

SUMMARY We are maintaining our Neutral investment thesis on Canadian Natural Resources, reflecting a balanced risk/reward profile. The company s large, diversified oil and gas asset bases, together with international exposure and a well-balanced blend of conventional and unconventional prospects, provides a buffer against uncertainties in the sector. Importantly, the recently acquired conventional Canadian assets are expected to enhance output significantly. However, CNQ s exposure to the inherently cyclical and volatile E&P sector offsets these strengths and remains a key area of concern, in our view. The company s rising operating costs add to the bearish sentiment.

SUMMARY DATA 52-Week High 52-Week Low One-Year Return (%) Beta Average Daily Volume (sh)

$46.23 $29.28 44.21 1.51 2,089,299

Shares Outstanding (mil) Market Capitalization ($mil) Short Interest Ratio (days) Institutional Ownership (%) Insider Ownership (%)

1,093 $49,405 3.56 61 5

Annual Cash Dividend Dividend Yield (%)

$0.83 1.84

5-Yr. Historical Growth Rates Sales (%) Earnings Per Share (%) Dividend (%)

14.2 -6.3 29.3

P/E using TTM EPS

17.5

P/E using 2014 Estimate

13.5

P/E using 2015 Estimate

13.6

Zacks Rank *: Short Term 1 3 months outlook

3 - Hold

Below Avg.,

Risk Level * Type of Stock Industry Zacks Industry Rank *

Large-Blend Oil-C$ Exp&Prod 164 out of 267

ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $)

2012 2013 2014 2015

Q1

Q2

Q3

Q4

Year

(Mar)

(Jun)

(Sep)

(Dec)

(Dec)

3,519 A

3,864 A

3,559 A

3,732 A

14,674 A

3,726 A

3,698 A

4,482 A

3,760 A

15,666 A

3,989 A

4,771 E

4,647 E

5,912 E

19,319 E

4,897 E

4,765 E

20,015 E

Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses)*

Q1 (Mar)

2012 2013 2014 2015

Q2 (Jun)

Q3 (Sep)

Q4 (Dec)

Year (Dec)

$0.27 A

$0.54 A

$0.32 A

$0.33 A

$1.46 A

$0.37 A

$0.41 A

$0.90 A

$0.50 A

$2.18 A

$0.77 A

$0.91 E

$0.79 E

$0.89 E

$3.36 E

$0.73 E

$0.67 E

Projected EPS Growth - Next 5 Years %

* Definition / Disclosure on last page

© 2014 Zacks Investment Research, All Rights reserved.

www.Zacks.com

10 S. Riverside Plaza, Chicago IL 60606

$3.32 E

8

OVERVIEW Calgary, Alberta-based Canadian Natural Resources Ltd. (CNQ) is engaged in the acquisition, development and exploitation of crude oil and natural gas properties. It is one of the largest independent exploration and production (E&P) companies in Canada, with extensive heavy crude oil and natural gas developments. Canadian Natural Resources core operations are focused in western Canada, the United Kingdom sector of the North Sea and offshore West Africa. As of the end-2013, the company had approximately 5,137 million oil-equivalent barrels (MMBOE) in total proved reserves, of which 86% was crude oil/liquids and 14% natural gas. In addition, Canadian Natural had approximately 3,289 million barrels in total proved and probable reserves in its oil sands (naturally occurring mixtures of bitumen water and sand) operations in the Province of Alberta. Production averaged 671,162 oil-equivalent barrels per day (BOE/d) during 2013, comprising 71% crude oil/ liquid hydrocarbons and 29% gas. Till date, the company s most prominent initiative is its Horizon Oil Sands Project in the Athabasca oil sands play of northern Alberta. Canadian Natural achieved the first synthetic crude oil production from the $8.3 billion project in Feb 2009. Designed to produce 110,000-250,000 barrels of synthetic crude per day, the company completed Phase I construction of the project in 2009. The Canadian oil sands, with their estimated 200 billion barrels of recoverable reserves, are the only oil resource to rival that of Saudi Arabia. The company s estimates indicate 6-8 billion net recoverable barrels for its Horizon acreage.

REASONS TO BUY Canadian Natural Resources has a broad portfolio of low-risk exploration and development projects that yield long-term volume growth at above-average rates. We appreciate the company s diverse asset base both geographically and in terms of products, comprising approximately 30% natural gas and 70% crude oil with the bulk of production located in G8 countries. We believe that this significantly reduces the company s risk profile and lends its results a high level of stability. In addition to the conventional oil and gas production assets, Canadian Natural is also a major oil sands player with several projects in inventory. The company achieved a significant milestone in Feb 2009 when it started the Horizon oil sands program. Production of Synthetic Crude Oil (SCO) from the project has averaged more than 100,000 barrels per day (Bbl/d) in 2013. The company expects annual production eventually ramping up to 500,000 Bbl/d by the next decade, thereby significantly augmenting Canadian Natural s long-term production growth profile. Canadian Natural has recently bought certain liquids-rich natural gas properties in western Canada from Devon Energy Corp. The assets hold an estimated 272.2 MMBOE in proved reserves (70% gas) and will likely boost growth in core areas, with scope for further improvement. Canadian Natural displays a healthy financial position, reflected by a debt-to-capitalization ratio of 28.2%, making the company less susceptible to financial risks. Backed by this strength, management has hiked dividend for 14 consecutive years.

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REASONS TO SELL Canadian Natural pursues long-term oil projects, which call for large capital outlays and several years of development before any cash flow is realized. Therefore, cost and time overrun in the company s ongoing projects have a negative impact on the stock s performance. Canadian Natural s total costs have been substantially rising for the last two years, which is a matter of concern. The company reported total expenses of C$13,109 million in 2013, reflecting an increase of roughly 32.7% from 2011 and 9.4% from the 2012 level. Canadian Natural conducts operations in many countries, with a major portion of its total revenue coming from international markets. As such, the company is exposed to risks associated with doing business abroad. Such risks include embargoes and/or expropriation of assets, exchange rate risks, terrorism and political/civil sentiment. Environmental organizations argue that oil sand crude are greenhouse-gas intensive, thereby contributing to global warming. As such, there have been widespread regulations over Canada s oil sands development in an attempt to stem global climate change and meet the country s emissionsreduction goals. These policies could impact the future profitability in the oil sand business.

RECENT NEWS Second Quarter 2014 Results Announcement Canadian Natural Resources plans to release its second quarter 2014 results on Aug 7, 2014 before the opening bell.

Canadian Natural Resources Prices C$1B Notes On May 8, 2014, Canadian Natural Resources reported the pricing of C$1.0 billion unsecured notes. Of this, C$500 million of notes with a coupon rate of 2.6% are expected to mature in Dec 3, 2019 and the remaining C$500.0 million of notes with a coupon rate of 3.55% will likely mature in Jun 3, 2024. The 2019 notes were sold to Canadian investors at 99.822% of par value, resulting in a yield to maturity of 2.635%. The 2024 notes were sold at 99.633% of par, resulting in a yield to maturity of 3.594%. Canadian Natural intends to utilize the net proceeds for normal corporate activities and to pay debt.

First Quarter 2014 Results Canadian Natural Resources Ltd. reported better-than-expected first-quarter 2014 earnings after the closing bell on May 8, 2014. The company reported earnings (excluding one-time and non-cash items) of C$0.85 (US$0.77), substantially higher than the year-ago quarter s adjusted profit of C$0.37 and ahead of the Zacks Consensus Estimate of US$0.73 on the back of higher natural gas and liquid realizations.

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Quarterly revenues of C$4,396.0 million (US$3,988.5 million) were also up 17.1% from the year-ago period. The top line, however, fell short of the Zacks Consensus Estimate of US$4,286.0 million. A decrease in liquid production from the North Sea and offshore Africa regions led to the miss. Canadian Natural s first-quarter cash flow from operations a key metric to gauge its capability to fund new projects and drilling amounted to C$2,146.0 million, which was 36.6% higher than first-quarter 2013. Production Canadian Natural reported quarterly production of 684,647 barrels of oil equivalent per day (BOE/d), marginally higher than 680,844 BOE/d in the prior-year quarter. Natural gas production increased to 1,175 million cubic feet per day (MMcf/d) from 1,150 MMcf/d in the first quarter of 2013. However, oil and natural gas liquids (NGLs) production decreased to 488,788 barrels per day (Bbl/d) from 489,157 Bbl/d in the year-ago quarter. Realized Prices On a reported basis, the average realized crude oil price (before hedging) during the first quarter was C$79.68 per barrel, representing an increase of 30.9% from the corresponding quarter last year. The average realized natural gas price (excluding hedging) during the three months ended Mar 31, 2014 was C$5.69 per thousand cubic feet (Mcf), up from the year-ago level of C$3.51 per Mcf. Total Expenses Total expenses came in at C$3,491.0 million, reflecting a rise of roughly 1.8% from C$3,428.0 million in the year-earlier quarter. Capital Expenditure & Balance Sheet Canadian Natural's total capital spending during the reported quarter was C$1,893.0 million, as against C$1,736.0 million in the year-ago quarter. As of Mar 31, 2014, Canada s second-largest natural gas producer had C$19.0 million cash and cash equivalents and long-term debt (including current portion) of approximately C$10,354.0 million, representing a debt-to-capitalization ratio of 28.2%. Guidance For second-quarter 2014, Canadian Natural anticipates liquid production in the 519,000 546,000 Bbl/d range while natural gas output is expected between 1,620 Mmcf/d to 1,660 Mmcf/d. Canadian Natural anticipates 2014 liquid production in the 537,000 574,000 Bbl/d band. Moreover, the company increased its expected 2014 natural gas output to the 1,530 1,570 Mmcf/d range. The company anticipates 2014 capital expenditure in the range of C$11,730.0 C$12,130.0 million.

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VALUATION

We applaud Canadian Natural Resources diverse asset base, strong financial backup and efficient management team. Moreover, the future prospects of the company seem bright as it recently bought certain conventional liquid rich properties in Canada, which are likely to drive production in the near future. However, we think that these factors are adequately reflected in the present valuation, leaving little room for meaningful upside from current levels. Another area of concern is its rising operating costs. This is reflected in our continued Neutral recommendation on the company s shares. Canadian Natural Resources trailing 12-month P/CF multiple is 7.4, compared to the 9.8 average for the peer group and 14.8 for the S&P 500. The company s trailing 12-month EV/EBITDA multiple is 7.2, compared to the industry average of negative 1.0. Our $47 price objective represents a multiple of 7.7x trailing 12-month cash flow.

Key Indicators

Canadian Natural Resources Ltd. (CNQ) Industry Average S&P 500

P/E F1

P/E F2

Est. 5-Yr EPS Gr%

P/CF (TTM)

P/E (TTM)

P/E 5-Yr High (TTM)

P/E 5-Yr Low (TTM)

13.5

13.6

8.0

7.4

17.5

29.6

10.7

321.5 16.9

20.5 15.8

6.2 10.7

9.8 14.8

33.9 18.2

94.9 27.7

23.8 12.0

Paradigm Oil and Gas Inc. (PDGO) Africa Oil Corp (AOIFF) 4.6 Talisman Energy Inc. (TLM) 36.0 30.5 6.0 116.5 Pacific Rubiales Energy Corp. (PEGFF) 3.3 14.8 21.0 TTM is trailing 12 months; F1 is 2014 and F2 is 2015, CF is operating cash flow

10.8 7.7

P/B Last Qtr.

P/B 5-Yr High

P/B 5-Yr Low

ROE (TTM)

D/E Last Qtr.

Div Yield Last Qtr.

Canadian Natural Resources Ltd. (CNQ)

2.1

2.7

1.2

10.0

0.3

1.8

7.2

Industry Average S&P 500

1.7 4.7

1.7 9.8

1.7 3.2

-10.2 23.1

0.4

1.6 0.0

-1.0

Equity Research

EV/EBITDA (TTM)

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Earnings Surprise and Estimate Revision History

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DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of CNQ. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1099 companies covered: Outperform - 15.7%, Neutral - 78.9%, Underperform 4.9%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each th stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively.

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