Investing in energy is a risky business, and not something you should get addicted to. Energy producers have little to no pricing power, often waste money on expensive projects, and are subject to massive boom and bust cycles.
That being said, there’s nothing wrong with a little energy exposure, as long as you don’t get carried away. I would estimate that two energy companies are sufficient for a diversified portfolio. On that note, below we take a look at two prime candidates. Ideally they should be enough to satisfy any energy stock appetite.
1. Canadian Natural Resources Limited
Among Canadian energy producers, few (if any) have a better track record than Canadian Natural Resources Limited (TSX: CNQ)(NYSE: CNQ). The energy giant has built a reputation for buying assets cheaply and keeping costs under control. The results have been staggering; over the past 15 years, the shares have returned 17% annually.
So it’s easy to see how CNRL shares are lower risk than other energy stocks. If the oil market tanks, the company’s focus on costs allows it to persevere. Better yet, a weak market allows the company to pick up assets cheaply, just like it did in February when it purchased $3.1 billion of assets from Devon Energy.
Best of all, CNRL is not overly expensive. According to filings at the end of 2013, its reserves are worth just over $60 billion, using a 10% discount rate and reasonably conservative oil price assumptions. And that’s about what the company is selling for (including debt). Not a bad deal for a company with such a strong track record.
2. Cenovus Energy Inc
When investing in energy, or any commodity for that matter, it helps to invest in the low-cost producer. Why? Well, the low-cost producer can persevere when the market turns the wrong way, helping to lower the risk of investing in that company’s shares.
Being a low-cost producer has another advantage: flexibility. We can see that CNRL offers a perfect example; when the market turns the wrong way, the still-healthy producers can snap up cheap assets, since these companies are the only ones still willing to spend money.
And Cenovus Energy Inc (TSX: CVE)(NYSE: CVE) has some of the lowest-cost assets in the oil sands. In fact, BMO ranked Foster Creek, partially owned by Cenovus, as the lowest-cost operation of its kind. And its operations at Christina Lake are also right near the top of the list.
Cenovus shares have lagged in the past year due to some operational challenges at Foster Creek, but that should not deter you. There’s still a very capable management team, focused on developing some of the country’s best energy assets.
No need for any others
In Canadian energy, you will find a plethora of options. Whether you’re looking for fast growth, high dividends, turnarounds, or low costs, there’s something for you. But that doesn’t mean you should choose a bunch of names for your portfolio; this isn’t a buffet.
Instead, you might be satisfied with two quality companies. Then you can move on to industries more suitable for your investment dollars.
