Contrarian investors are on the prowl for unloved energy stocks that could offer some big upside returns.
Let’s take a look at Suncor Energy Inc. (TSX:SU)(NYSE:SU) and Crescent Point Energy Corp. (TSX:CPG)(NYSE:CPG) to see if one is attractive right now.
Suncor
Suncor’s diversified business lines have helped the company navigate the oil rout in better shape than many of its peers.
Why?
Suncor is primarily known as an oil sands giant, but the company also owns refineries and more than 1,500 Petro-Canada retail locations.
Low oil prices have been tough on margins at the upstream operations, but the marketing end of the business has often picked up the slack in recent years as reduced input costs for the refinery can result in a nice boost to margins on the finished products, depending on price spreads in the market.
In addition, lower oil prices normally lead to falling gasoline prices, and that tends to motivate drivers to take more trips and buy vehicles with larger engines.
Suncor’s balance sheet is in good shape, and management has used the downturn to pick up strategic assets at very attractive prices. When oil prices recover, investors should see solid returns on the investments.
The company continues to raise the dividend, despite the difficult times in the energy sector. At the time of writing, the distribution provides a yield of 3.5%.
The payout should be safe, even if the industry remains under pressure.
Crescent Point
Crescent Point used to be the dividend darling in the energy patch, but the extended slump in oil prices forced the company to slash the monthly distribution from $0.23 to $0.10 and then again to the current level of $0.03 per share.
In the Q1 2017 earnings report, Crescent Point said it would have a payout ratio of 91% with WTI oil averaging US$55 per barrel.
WTI has been below that level for most of 2017, so there is a chance the distribution could take another hit if oil prices remain under pressure through the end of the year and into 2018.
On the positive side, Crescent Point owns a very attractive asset base and recently renewed its credit facilities.
As of June 26, Crescent Point had $1.5 billion in unused available credit, providing the company with adequate liquidity to ride out further weakness in the sector.
Management says the company is ahead of its production targets for 2017, and expects exit production growth of at least 10%.
The stock is now below $10 per share, which is a far cry from the $45 it traded for back in the summer of 2014.
Is one an attractive pick?
Both stocks have strong upside potential on a rebound in oil prices.
If you think oil is headed higher in the near term, Crescent Point probably offers a better shot at big gains over a short period of time, but the downside risk on another plunge in oil is also significant.
If you are a long-term oil bull, but think more pain could be on the way through the end of the year, Suncor might be the safer pick. The stock will drift lower as oil prices fall, but not as sharply as the pure-play producers.
Suncor’s dividend looks solid, so you get a nice yield while you wait for better days.
