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2 Energy Stocks That Should Outperform the TSX in 2018

Last year was a rough year for the energy sector. While the S&P/TSX Composite Index rose 5%, the iShares S&P/TSX Capped Energy Index Fund fell 11% in 2017, despite a 15% rally in the price of WTI crude oil over the past year.

With oil price rising on forecasts for growing demand, this will help push up energy stocks prices. It’s time to buy those stocks on the dip to profit from rising prices.

Below are two stocks in the oil and gas sector that performed well in their last quarter and that should outperform the TSX this year.

Suncor Energy Inc. (TSX:SU)(NYSE:SU)

The largest integrated oil and gas company in Canada reported strong 2017 fourth-quarter results overall, particularly in the oil sands operations.

Total revenue increased by 22.6% to $4.12 billion in 2017 fourth quarter as compared to 2016 fourth quarter. Net earnings soared 160% to $1.38 billion, or $0.84 per share. Operating earnings per share were up 108% from a year earlier to $0.79, beating analysts’ forecast by $0.07. Funds from operations rose to a record $3.02 billion, up 28% from the fourth quarter in 2016. Cash operating costs in the oil sands segment dropped to $24.20 per barrel compared to $24.95 in the same quarter last year.

Suncor benefited from the higher oil price in the most recent quarter compared to the same quarter a year earlier, boosting the company’s results.

The energy company continues to execute its growth ambitions with its portfolio of growth projects. Its strong balance sheet allows Suncor to take advantage of interesting acquisition opportunities.

Due to its strong performance and growth prospects, Suncor hiked its dividend by 12.5% to $0.36 per share quarterly. This represents an interesting yield of 3.3% at the current stock’s price. The integrated company’s earnings are expected to grow at an average rate of 13% per year over the next five years.

Suncor stands out in the energy sector with its integrated business structure that gives the company some protection against downturns in oil prices. This may explain the stronger performance of Suncor compared to its peers in 2014 and 2015, a period during which falling oil price weighed on energy companies.

Baytex Energy Corp. (TSX:BTE)(NYSE:BTE)

The Calgary-based oil and gas company reported better-than-expected 2017 fourth-quarter and full-year results.

Revenue soared almost 30% to $302.2 million, beating consensus by $23.5 million. The energy company reported earnings per share of $0.32 in the fourth quarter, while analysts expected earnings per share of $0.12.

In the last quarter, Baytex reported adjusted funds flow of $106 million, or $0.45 per share, up 37% from a year ago. For 2017, adjusted funds flow were $348 million, or $1.48 per share, up 26% over 2016. This rise was driven by a 7% production increase and higher oil prices compared to 2016.

The company was able to decrease its net debt by $39 million to $1.73 billion. As Baytex is generating more cash flow and improving its balance sheet, there is less risk associated with the company, and investors should eventually become more confident in the stock.

Baytex’s earnings prospects are very strong, with earnings estimated to grow at an average rate of 47.6% per year over the next five years.

Baytex’s stock price has fallen by about 20% over one year, while the oil price has increased by about 35%. As oil keeps rising, this represents an opportunity to buy Baytex on the dip, as its share price will eventually go up again when investors realize the potential of this oil company.

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Fool contributor Stephanie Bedard-Chateauneuf has no position in any of the stocks mentioned.

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