Contrarian Investors: Why These Dirt-Cheap Energy Stocks Are Set to Take Off

Peyto Exploration and Development Corp. (TSX:PEY) is among natural gas stocks that are bargains.

| More on:
The Motley Fool

Do you remember the last time you invested in a quality company in times of cyclical lows? While it can be unnerving, this is a strategy that pays off handsomely in the end. Let’s look at three quality companies that are trading at lows because their industry (the natural gas industry) is at cyclical lows.

After years of experience analyzing stocks and the oil and gas industry, I know at least one thing for certain: it is extremely difficult to accurately predict commodity prices, and oil and gas prices are no different.

But there is one more thing that I have also learned: usually, the answer to low commodity prices is low commodity prices. Confused?

Let me explain. Through market forces, two things happen. First, low commodity prices necessitate that companies streamline their operations and become more efficient, thus producing at lower cost.

Second, lower prices eventually result in increased demand for the commodity, and the market eventually rebalances. Now the problem here is that timing is extremely difficult to predict.

But if we can invest in a company that has a healthy balance sheet and therefore the ability to survive in the hard times, we have the opportunity to make a significant profit.

Here are three natural gas stocks that currently have healthy balance sheets, strong and growing productions profiles, and quality, low-risk asset bases.

Peyto Exploration and Development Corp. (TSX:PEY) is a $3.2 billion market capitalization oil and gas company with over 90% of its production from natural gas, most of it coming from the Deep Basin of Alberta.

With Peyto, we get the lowest-cost intermediate natural gas producer and a 6.9% dividend yield.

And with this, Peyto is a rarity among intermediate natural gas producers. Its total cash cost is $4.11 per barrel of equivalent oil (boe), and Peyto’s capital discipline has paid off handsomely.

Tourmaline Oil Corp. (TSX:TOU), with 85% of its production coming from natural gas, also has a very rapidly growing production profile, with production per share increasing at a cumulative average growth rate of 33% from 2010 to 2016.

And during this time, operating costs have been reduced dramatically from over $6 per barrel of oil to just over $3.

With a 78% natural gas weighting, Birchcliff Energy Ltd. (TSX:BIR) is also expecting strong production growth of almost 40% this year. And with its flexible balance sheet, which has a reasonable level of debt (25% debt-to-total capitalization ratio), the company is able to continue growing its production well into the future.

The message here is that with these stocks, we can wait patiently for the tide to turn on natural gas prices, and when it does, this patience will be greatly rewarded.

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 Karen Thomas owns shares of Birchcliff Energy.

More on Dividend Stocks

Dividend Stocks

2 of the Best Dividend Stocks to Buy Before They Start to Recover

These dividend stocks offer superior deals for those seeking long-term passive income, but these prices certainly won't last forever.

Read more »

HIGH VOLTAGE ELECRICITY TOWERS
Dividend Stocks

Algonquin Insiders Are Loading Up on AQN Stock – Should You Follow?

Algonquin Power and Utilities (TSX:AQN) insiders poured millions into AQN stock last week. Share valuation multiples seem compelling.

Read more »

Retirees sip their morning coffee outside.
Dividend Stocks

TFSA: 2 Stocks To Earn Passive Income Even in a Recession

Investors are coping with 2023 recession fears differently. Some are investing in stocks that can create long-term passive income.

Read more »

Cogs turning against each other
Dividend Stocks

3 Stocks You Can Confidently Own in an Upside-Down Market

Although many stocks have lost major value this year, here are three high-quality companies you can confidently own in this…

Read more »

Increasing yield
Dividend Stocks

2 Ultra-High-Yield Dividend Stocks on Sale Today

Besides their ultra-high yields, here are more factors that make these two of the best Canadian dividend stocks worth buying…

Read more »

money cash dividends
Dividend Stocks

These Canadian Stocks Actually Pay You to Own Them

While the stock market continues to face significant headwinds, consider these Canadian stocks that will pay you to own them.

Read more »

The sun sets behind a high voltage telecom tower.
Dividend Stocks

3 Top Utility Stocks to Buy Right Now

Are you looking for utility stocks to add to your portfolio? Here are three top picks!

Read more »

ETF chart stocks
Dividend Stocks

My Favourite Investing Ideas on the TSX Today

Investors can bet on TSX energy and bank stocks using these two ETFs.

Read more »