The Motley Fool

Your Instant 3-Stock Energy Portfolio

New investors looking to put together a top-quality portfolio of dividend-growth energy stocks should consider Suncor Energy Inc. (TSX: SU)(NYSE: SU), Cenovus Energy Inc. (TSX: CVE)(NYSE: CVE), and Canadian Natural Resources Limited (TSX: CNQ)(NYSE: CNQ) as their top picks for long-term holdings.

Let’s take a look at why I think these three companies are must-have stocks for every energy portfolio.

Suncor Energy Inc.

Canada’s largest integrated oil company has 6.9 billion barrels of oil reserves and another 23.5 billion barrels of contingent resources primarily located in the oil sands region of Alberta.

Oil production is a big part of Suncor’s business operations, but the reason I like Suncor for an energy portfolio is the earnings diversification in its business model. Suncor derives revenue from refining and retailing in addition to producing the oil.

The refining facility the company runs in Montreal has historically relied on foreign crude oil as feedstock. This may seem odd but it was actually cheaper and easier to import oil from overseas than to try to source it from western Canada.

That situation has changed. Suncor will soon be able supply the Montreal refinery with lower-priced western Canadian crude by shipping it across Line 9 operated by Enbridge Inc. Enbridge is in the process of reversing the flow of the pipeline and the project should be completed next year. Currently, Suncor is using rail transport to send the oil across the country. This supply change is important for investors because the profit margins at the refinery could jump significantly given the reduced input cost.

Suncor also operates 1,500 Petro-Canada wholesale and retail facilities that sell gasoline, diesel, and a variety of other products.

The company pays a dividend of $1.12 per share that currently yields about 2.6%. The dividend has increased by 560% in the past five years.

Cenovus Energy Inc.

The case for investing in Cenovus is all about production expansion. In its Q2 2014 earnings statement, it reported a staggering 33% increase in oil sands production compared to Q2 2013. The result was record cash flow of nearly $1.2 billion, a 37% year-over-year increase.

The exciting news for investors is that production and cash flow will continue to rise moving forward.

Big expansions at its Christina Lake and Foster Creek projects should be completed on time and on budget and will substantially boost the company’s oil output in the next two years.

Cenovus is a 50% joint owner with Conoco Phillips on the projects.

To put things in perspective, Cenovus’ second-quarter total crude oil production averaged about 200,000 barrels per day. Foster Creek alone is expected to be at peak production of 295,000 barrels per day by 2019. Christina Lake will top out at just over 300,000 barrels per day.

Cenovus pays a dividend of $1.08 that yields about 3.2%. Investors should see the dividend grow substantially in the coming years as higher production releases a raging river of free cash flow.

Canadian Natural Resources Limited

Canadian Natural probably owns the best basket of oil and gas assets in Canada. It is one of the largest natural gas producers in western Canada, and is the foremost producer of heavy crude oil, led by its world-class Pelican Lake project. Canadian Natural also owns and operates the Horizon Oil Sands project.

This diversification in its properties makes Canadian Natural a top pick for any energy-sector investor. The balanced portfolio of natural gas, light crude oil, and heavy crude oil helps the company diversify earnings when commodity prices are fluctuating.

Canadian Natural also owns 100% of most of its assets, giving it the flexibility it needs to quickly allocate capital to the most profitable projects.

The company recently reported record levels of free cash flow. The dividend is up 100% in the past two years and further increases should be coming. The current distribution of $0.90 yields about 2%.

The bottom line

The current weakness in the price of oil is putting some pressure on energy stocks. Investors have an opportunity right now to buy these stocks at reasonable valuations.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Walker has no position in any stocks mentioned.

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