As 2018 draws closer, there are some interesting opportunities for long-term income investors to consider, especially at a time when oil prices are firming up and the industry has gone through a major consolidation.
The reason for my bullish call on these two companies is that both players have leading positions in the energy space and are well positioned to produce higher returns if oil prices continue their upward journey.
Oil prices are trading near 2.5-year highs, gaining strength from a cut in production, which has been in place since the start of the year, by the Organization of the Petroleum Exporting Countries (OPEC) and a group of non-OPEC producers, including Russia.
Suncor and CNRL both took advantage of the 2014 oil downturn to acquire billions of dollars of cheap energy assets. CNRL acquired oil sands assets from Royal Dutch Shell — a move which has begun to boost its cash flows as oil prices continue to recover.
After the Royal Dutch deal, CNRL closed another deal in May, acquiring a 70% non-controlling stake in the Athabasca Oil Sands Project Mines, adding 2.3 billion barrels of proven reserves in its production capacity.
The company is predicting it will increase its cash flows to $6.5-6.9 billion this year, up from $4.3 billion in 2016 on a 37% jump in its oil production.
With a dividend yield of 2.77%, CNRL pays a $0.28-a-share quarterly dividend, or annualized $1.1 a share, which is 17% higher than what it delivered last year.
Like CNRL, Suncor has also positioned itself for a strong growth after a running a successful cost-cutting drive during this oil slump. In 2016, the company acquired a controlling interest in the Syncrude Canada mining project in a hostile takeover.
Throughout the downturn, Suncor focused on boosting shareholder returns. This year, it announced a plan to buy back up to $2 billion of its shares and cut down its debt.
It is tough to beat Suncor’s track record. The company has been increasing dividends for the past 15 years. The latest was in the first quarter of 2017, when the quarterly payout was increased by 10% to $0.32 a share — $1.28 on yearly basis.
Which one should you buy?
Both CNRL and Suncor are great buys for 2018. Both companies have strong asset base to benefit from rising oil prices. Their aggressive acquisitions during the downturn have positioned them to ramp up production as demand recovers. Both companies pay dividends, which is a great advantage for dividend investors. A 50-50 allocation of your energy-focused investment between these two stocks won’t be a bad idea.