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2 Energy Stocks Trading for Bargains

Energy stocks in Alberta and Western Canada have seen some of the worst over the last few years in terms of share performance. Foreign and domestic investors have been fleeing for years, and even the most resilient have started to leave the sector.

The expectations have been dismal and although the operating environment hasn’t been great, it hasn’t turned out nearly as bad as predicted.

This has left a number of companies undervalued and doing better than the market had expected, which is creating a buying opportunity for investors.

These companies surely won’t remain this cheap for long, as investors move back into the sector and bid up the share prices.

Two energy companies I’d be buying soon are Husky Energy Inc (TSX:HSE) and Canadian Natural Resources Ltd (TSX:CNQ)(NYSE:CNQ).

Husky Energy

Husky is one of the top integrated oil companies in Canada. It has upstream and downstream operations that account for 80% of business as well as offshore production that accounts for the remaining 20%.

Husky has big growth plans and is expecting to generate $8.7 billion in free cash flow over the next five years, at an average oil price of just $60. Even at $40 WTI, the company’s net debt-to-funds ratio from operations is less than 2.0 times, which is super stable.

Husky has refineries in key markets and continues to make strategic moves. It has also been continuously improving its operating margin which is inevitably making the company more profitable.

Its balance sheet is another quality for Husky; with debt of less than $5 billion, its debt-to-equity is just 0.2 times.

On both a price-to-book and price-to-earnings basis the company is extremely cheap. Its dividend is yielding around 5.3%, and it’s trading near its 52-week low, making Husky a steal for investors.

Canadian Natural Resources

Canadian Natural is one of the largest oil producers in Canada. That is one of the main reasons why its stock is also at the low end of its 52-week range.

It has done well in the last few years to manage its debt and finances all while decreasing its production as a result of Alberta’s mandatory cuts.

It has cut its maintenance expense from more than $11 billion in 2014 to near $4 billion in 2019. This hasn’t been without a number of sacrifices though.

One of the sacrifices it’s made is reducing its spending on near-term growth projects. This is a slight negative, but given the pricing environment, growth projects coming online soon would be pointless.

Another thing that may worry investors is its high debt load. Even though it has done a great job managing its debt through the tough few years we have had, its debt is still quite high at nearly $20 billion.

What’s really incredible is that Canadian Natural has managed to increase its dividend each year since the oil catastrophe, bringing its total consecutive years of dividend increases up to 19. The dividend currently yields 4.5%.

It has also been able to make a healthy net income the last two years, showing its capability of operating in any environment.

It has a number of growth opportunities in the oil sands that will provide it significant returns for decades.

Bottom line

Both companies have weathered the storm as well as they could. Now that it looks like we may be at the bottom and looking forward to growth, these stocks are some of the best opportunities on the TSX.

Finding stocks in an industry that is going to grow, and that are cheap, is the number one way to make superior investment returns.

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Fool contributor Daniel Da Costa has no position in any of the stocks mentioned.

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