The Motley Fool

RRSP Investors: Act Now! These 2 Energy Stocks Have Finally Bottomed With Big Upside to Come

Image source: Getty Images

With the market sell-off and pressure still rearing its ugly head, sending richly valued and undervalued stocks alike plummeting, we can at least say that the energy sector is nearing a bottom. This selling action is not new for the energy sector and energy stocks, which are now pricing in significant pessimism.

So, while the market in general may have a lot of downside left, I think the energy sector is already there and showing signs that it is bottoming out.

Two oil and gas companies reported their first-quarter 2019 results yesterday. Results show investors evidence that the state of the oil and gas industry is not as bad as what the stocks are pricing in.

Freehold Royalties (TSX:FRU)

Freehold Royalties once again reported a quarter that demonstrates its cash flow power and its reliability as a dividend stock.

Generating funds from operations of $29 million, paying out $18.6 million in dividends, with production declining 9% from the same period last year, we can see that the dividend remains nicely covered with ample flexibility.

Freehold’s free cash flow yield is 12%, and its dividend yield is currently 7.23%. Free cash flows will be deployed toward debt reduction, acquisitions, and the dividend, with the goal of maximizing shareholder value.

It’s a good time to be buying in the energy sector, with depressed valuations everywhere, so I look forward to some compelling transactions.

Although we continue to see solid results from Freehold, the stock remains depressed.

Nuvista Energy (TSX:NVA)

Nuvista stock has gotten crushed since its highs of last year, losing half of its value. And with a 60% natural gas weighting, we can easily see why. But the company’s first-quarter 2019 results, which were released yesterday, paint a different story.

Production increased 21% versus the same period last year, adjusted funds flow increased 13%, netback increased 29%, and costs are coming down, with a 7% reduction in operating costs and a 24% reduction in net G&A expenses.

Clearly, Nuvista is on a roll, and its exposure to the very prolific Montney resource play is expected to continue to drive strong results in the next few years. We can expect strong production growth of almost 20% this year, and we can expect to see cash flow growth of north of 30%.

Final thoughts

While the market in general seems to be adjusting to and factoring in more of the risks that are present today, energy stocks have spent the last few years doing that and, at this point, are showing real value and improvements, which confirms my thesis that energy stocks are bottoming and have big upside.

Just Released! 5 Stocks Under $49 (FREE REPORT)

Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share.
Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.
Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your FREE 5-stock report now!

Fool contributor Karen Thomas owns shares of NUVISTA ENERGY LTD. Freehold is a recommendation of Dividend Investor Canada.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.