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A Top High-Income Energy Stock That Could Soar Higher

From out of nowhere many oil stocks have become great again through the eyes of investors. But with President Trump on a mission to bring down oil prices from what he believes are artificially high levels, does it still make sense to be a buyer of oil plays after the recent rally? Or will recent gains in many popular oil plays be surrendered in a hurry as Trump continues his verbal attack on OPEC, an organization that Trump has referred to as an “illegal monopoly” in the past?

Oil prices are notoriously hard to predict, which is why Canada’s integrated plays have been fantastic low-risk/high-reward investments for those who want downside protection from another unexpected oil plunge.

When it comes to integrated plays, Canadian Natural Resources Ltd. (TSX:CNQ)(NYSE:CNQ) really stands out as a major winner should oil prices continue to climb higher. Even if they don’t, the company’s lower-than-average cost structure will allow it to weather a storm better than many of its peers in the space. In addition, the dividend yield is as reliable as they come and makes for a great holding for those who want to get paid, regardless of what the price of oil is at any given point.

Shares of Canadian Natural soared ~17% since last month’s lows, but the stock’s still not absurdly expensive when comparing traditional valuation metrics versus their historical averages. At the time of writing, the stock trades at a 1.7 P/B multiple, a 3.0 P/S multiple, and a 7.3 P/CF, all of which are in line with the company’s five-year historical average multiples of 1.6, 2.7, and 7.8, respectively. Moreover, Canadian Natural trades at a mere 16.2 times forward earnings, which is substantially lower than that of the industry average and the company’s five-year historical average of 41.5, and 54.1, respectively.

Thus, for investors lacking in energy names, Canadian Natural still isn’t an expensive stock after the recent rally. Based on traditional valuation metrics, shares appear to be fairly valued, but if oil prices remain at the high US$60 levels or continue moving higher, shares could still be a major bargain at these levels, as the company has the ability to flip on the growth switch on if oil prices remain substantially higher than that of break-even costs of operation.

Canadian Natural owns some top-tier properties in the oil patch that can fuel production for many decades. With a 70% working interest in the Athabasca Oil Sands, the company is just waiting for an opportunity to turn on the taps. If Trump doesn’t derail oil’s positive momentum, I suspect there’s ample upside for Canadian Natural at these levels. Should they stabilize over the next few years, investors stand to be rewarded through generous dividend hikes and a profound amount of capital appreciation.

Bottom line

Canadian Natural is a low-risk/high-reward investment that every investor should have on their watch list if they’re thinking about profiting from a potential sustained recovery in oil prices.

Although shares are fairly valued based on traditional metrics, I’d wait for a meaningful pullback before initiating a large position, as action from Trump could provide investors with a much more attractive entry point over the next year. Keep the stock on your radar for now and wait for the price of admission to fall to the lower $40 levels.

Stay hungry. Stay Foolish.

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Fool contributor Joey Frenette has no position in any of the stocks mentioned.

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