LNG Canada Finally Gets Approval: A Big Win for Canadian Energy Stocks Such as Cenovus Energy Inc. (TSX:CVE)

Trading below book value, with natural gas production representing 20% of total production, Cenovus Energy Inc. (TSX:CVE)(NYSE:CVE) will see a huge benefit from rising natural gas prices.

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After years of talks, of almost happening, then being put on hold indefinitely, LNG Canada finally announced the approval of its mega LNG project.

It’s an approval that will ultimately open the natural gas market for Canadian natural gas producers. This is relevant on so many fronts.

It opens the demand side of the equation, bringing in more customers from around the world.

It opens pricing, effectively eliminating the discount that aeco (Canadian natural gas price) has been trading at relative to nymex (New York exchange natural gas price) and natural gas pricing around the world, which is much higher.

Also, natural gas inventories remain below five-year averages, traditionally a buy signal, despite talks of too much supply and relentlessly rising production.

And with this approval, we have the hope and possibility of other LNG projects coming to fruition in the next little while, as Shell’s CEO asserts that the need for additional LNG projects is strong in order to meet expected fast-growing demand for the fuel in the coming decades.

Shell is anticipating a 2% demand growth in LNG, much higher than other fuels, as the world embarks on its goal of reducing its carbon imprint and as natural gas takes its place as a “cleaner” fuel of choice. With this, we can anticipate strengthening natural gas pricing, which we have already started to see in anticipation of these changes.

I will look at two of the larger energy stocks that have exposure to this trend; they have significant natural gas production on top of their oil production, which has increasingly been supporting strong cash flow growth in recent years.

Canadian Natural Resources (TSX:CNQ)(NYSE:CNQ)

Natural gas represents roughly 30% of the company’s total production, and so Canadian Natural Resources stock is poised to benefit from rising natural gas prices.

In 2017, the average aeco price was $2.19 per million cubic feet (mcf) — part of a prolonged period of very depressed pricing.

With a 3.3% dividend yield, a stock price that has almost doubled from its 2016 lows, and a predictable and reliable stream of cash flow with little reserve-replacement risk, Canadian Natural remains a top pick for energy exposure.

Cenovus Energy (TSX:CVE)(NYSE:CVE)

Natural gas represents roughly 20% of the company’s total production, and so Cenovus stock is also poised to benefit from rising natural gas prices.

The company has a large resource base, good growth potential from its oil sands expansions, and an attractive valuation.

At 1.54%, Cenovus stock’s dividend yield is lower than CNQ stock, but with Cenovus we get a lower valuation due to its financial leverage, which is quite high relative to its peers.

But going forward, investors can expect the company’s asset-disposition program to generate significant funds that will be put to work to pay off debt, thereby improving the company’s balance sheet and risk profile.

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 Canadian Natural Resources and CDN NATURAL RES.

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