The Motley Fool

How to Access Promising Upside to Higher Energy Prices in a Safe Way

Energy stocks have generally underperformed the market in the last few years for those who invested at too high a price. With companies adjusting for the new normal of lower energy prices, now may be a good time to consider buying energy companies on dips.

A safe way to gain access to the future upside of energy prices is through large-cap, diversified companies, such as Suncor Energy Inc. (TSX:SU)(NYSE:SU) and Canadian Natural Resources Limited (TSX:CNQ)(NYSE:CNQ).

Suncor Energy

Suncor Energy has operations in multiple areas, including oil sands development and upgrading, offshore oil and gas production, petroleum refining, and product marketing under the Petro-Canada brand.

Moreover, Suncor Energy maintains a strong balance sheet. In Q1, its net debt to funds from operations was 1.8 times, its debt to capitalization was 27%, and it had $10.6 billion of liquidity. So, it’s not surprising that the company is awarded an S&P credit rating of A-.

Suncor Energy has a sustaining capital-reinvestment breakeven WTI price of under US$40 per barrel. Accounting for its dividend, which it has increased every year since 2003, the leading Canadian integrated energy company requires a WTI price of about US$48 per barrel to break even.

At under $38 per share, Suncor Energy offers a decent yield of nearly 3.4% and 12-month upside potential of 27% based on Thomson Reuters’s mean target of $48.50 per share.

Canadian Natural Resources

This year, Canadian Natural Resources’s product mix is estimated to be 30% natural gas, 29% oil sands mining and upgrading, 27% heavy crude oil, and 14% light crude oil and natural gas liquids. Moreover, the oil and gas producer maintains a strong balance sheet to support an investment-grade S&P credit rating of BBB+.

Canadian Natural Resources has a sustaining capital-reinvestment breakeven WTI price of about US$33 per barrel. Accounting for its dividend, which it has increased every year since 2002, the diversified oil and gas producer requires a WTI price of just under US$40 per barrel to break even.

At about $37.30 per share, Canadian Natural Resources offers a decent yield of nearly 3% and 12-month upside potential of 38% based on Thomson Reuters’s mean target of $51.60 per share.

Investor takeaway

Between the two, Suncor Energy provides more diversification and stability through its integrated business. That said, Canadian Natural Resources shares have higher upside potential, especially if the underlying commodity prices rise higher.

Nonetheless, the energy sector is obviously experiencing hardships. Last year, both companies increased their dividends by only 2%, while their long-term dividend-growth rates were 19% and 21%, respectively.

With their recent dips from the $44-per-share level, interested investors can consider averaging in to a position over time for double-digit upside potential.

The 10 Best Stocks to Buy This Month

Renowned Canadian investor Iain Butler just named 10 stocks for Canadians to buy TODAY. So if you’re tired of reading about other people getting rich in the stock market, this might be a good day for you. Because Motley Fool Canada is offering a full 65% off the list price of their top stock-picking service, plus a complete membership fee back guarantee on what you pay for the service. Simply click here to discover how you can take advantage of this.

Click Here to Learn More Today!

Fool contributor Kay Ng has no position in any stocks mentioned.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.