Why You Should Hold Canadian Natural Resources Ltd. Over EnCana Corporation

With times so tough, it’s clear that Canadian Natural Resources Ltd. (TSX:CNQ)(NYSE:CNQ) is better positioned to thrive than EnCana Corporation (TSX:ECA)(NYSE:ECA).

| More on:
The Motley Fool

With the recent plunge in oil prices, we are learning which energy companies have been most responsible, and which have not. As Warren Buffett has said, “Only when the tide goes out do you discover who’s been swimming naked.” And some energy companies have been very overexposed.

To illustrate, below we compare two Canadian energy companies: EnCana Corporation (TSX: ECA)(NYSE: ECA) and Canadian Natural Resources Ltd. (TSX: CNQ)(NYSE: CNQ). By the end of this article, it should be clear which company always wears its swimsuit.

EnCana doesn’t look so bright anymore

After Spanish giant Repsol agreed to buy Talisman Energy Inc. (TSX: TLM)(NYSE: TLM) for US$13 billion, it made some previous deals look terrible. Chief among them was EnCana’s US$7.1 billion deal for Athlon Energy Inc. in September.

To put this in perspective, EnCana paid about five times more per barrel for Athlon than Repsol did for Talisman. Granted, this isn’t a perfect apples to apples comparison. Talisman has other issues, such as some troubled assets in the North Sea – meanwhile, Athlon’s production is much more economic. But with a price difference this wide, Encana’s September purchase now looks like a mistake.

To be fair to EnCana, hindsight is always 20/20. But this is not the first time Encana has gone the wrong way. Back in 2009, it spun off its oil assets in order to focus on natural gas. When gas prices plunged, Encana was caught red-handed, and the company has sold gas assets into a buyer’s market since. In the meantime, it bought oil and liquids assets, which were much more popular and expensive.

At this point, EnCana may have a problem with culture. Because it cannot resist buying assets at the top of the market, and selling at the bottom. Longer term, this is bad news for shareholders – if you need any proof, its shares have returned only 1.6% per year over the last decade.

Canadian Natural may now become a predator

Meanwhile, over the last 10 years, Canadian Natural shares have returned nearly 12% per year. How has it performed so much better than Encana? Well, Canadian Natural does a couple of things particularly well. First of all, costs are always kept in check, an absolute must in the energy sector.

But just as impressively, Canadian Natural spends money very wisely. A perfect example of this occurred in February of this year, when the company purchased $3.1 billion worth of natural gas assets from Devon Energy, right when everyone else was selling. This allowed Canadian Natural to pick up these assets very cheaply.

So now, with oil prices so low, and so many companies looking to shed assets, Canadian Natural is perfectly positioned to snap up some more bargains. And in the long term, shareholders should come out ahead. You’re better off holding this swimsuit-wearer in your portfolio.

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 Benjamin Sinclair has no position in any stocks mentioned. The Motley Fool owns shares of Devon Energy.

More on Energy Stocks

Oil pumps against sunset
Energy Stocks

A Dividend Giant I’d Buy Over Suncor Energy Stock

Suncor Energy stock has crushed the broader markets in the last 20 years. But this TSX energy stock has beaten…

Read more »

oil tank at night
Energy Stocks

2 Incredibly Cheap Energy Stocks to Buy Now

Two cheap energy stocks are the best deals in TSX’s top-performing sector in 2024.

Read more »

grow dividends
Energy Stocks

Growth Spurt: 2 TSX Stocks Set to Skyrocket

Two growth stocks in expanding, niche markets are set to skyrocket further in 2024 and beyond.

Read more »

Nuclear power station cooling tower
Energy Stocks

Why Shares of Cameco Are Powering Higher

Cameco (TSX:CCO) shares have surged more than 400% in the last five years alone, with more growth on the way.

Read more »

stock analysis
Energy Stocks

Is Enbridge Stock a Good Buy in May 2024?

Boasting high-yielding dividends and a stable underlying business, Enbridge (TSX:ENB) might be a great buy for your self-directed investment portfolio…

Read more »

You Should Know This
Energy Stocks

Brookfield Infrastructure Is Up 9% After Earnings: What Investors Need to Know

A large-cap stock with a low-risk and strong revenue profile is an investment opportunity for income, growth, or both.

Read more »

Group of industrial workers in a refinery - oil processing equipment and machinery
Energy Stocks

2 No-Brainer Energy Stocks to Buy Right Now for Less Than $500

Here are two rallying Canadian energy stocks you can buy today with attractive dividend yields and growth potential.

Read more »

edit Businessman using calculator next to laptop
Energy Stocks

Could This Undervalued Stock Make You a Millionaire One Day?

It's been a long wait, but Ballard Power finally seems to be gaining the kind of momentum that's game changing.

Read more »