Energy Stock Rally: 3 Stocks That Could Climb Higher

These energy stocks are benefiting from higher energy prices that are supported by economic re-openings!

| More on:
Pipeline

Image source: Getty Images

The energy sector has experienced a strong comeback rally. A rally of 54% year to date is illustrated by iShares S&P/TSX Capped Energy Index ETF, an exchange-traded fund (ETF) that targets exposure to businesses in the Canadian energy sector.

XEG Chart

XEG data by YCharts.TSX:XEG year-to-date price action.

The ETF’s top five holdings are Canadian Natural Resources, Suncor Energy (TSX:SU)(NYSE:SU), Cenovus Energy, Tourmaline Oil,  and Imperial Oil. They make up about 25%, 24%, 13%, 8%, and 7% of the fund.

As the economy reopens post-pandemic from the assistance of successful vaccine rollouts, increased travel volumes by plane and car could help sustain relatively high oil prices. The West Texas Intermediate (WTI) oil price stands at about US$75 per barrel at writing. Some pundits think a surge in oil demand from reopenings could drive the WTI oil price to US$100!

Investors who are bullish on energy prices but want to limit company-specific risk can consider investing in the ETF. If you’re looking for more adventure and potentially safer or greater returns, you can consider these energy stocks.

Enbridge stock

Enbridge (TSX:ENB)(NYSE:ENB) stock’s juicy yield of about 6.7% should immediately stand out compared to iShares S&P/TSX Capped Energy Index ETF’s recent cash distribution yield of about 1.6%. While many investors chase growth and price appreciation, ENB stock investors can enjoy a stable return of about 6.7% from its dividend alone.

ENB investors don’t have to worry about where its stock price will go as long as Enbridge maintains its dividend and investors don’t need to sell the stock to get their money back.

Besides, it’s more likely than not that Enbridge stock will increase its payout, as it has done for 25 consecutive years with a sustainable payout ratio and steadily rising earnings or distributable cash flow. In summary, Enbridge stock is a relatively safe energy stock to invest in.

Suncor stock

Suncor stock is the second-largest holding of the energy ETF. It is an integrated energy company that is involved across the energy value chain. Its operations include oil sands development, production, and upgrading, offshore oil and gas, petroleum refining in Canada and the U.S., and a Petro-Canada retail distribution network. It has also installed electric vehicle fast chargers across its network.

The company will definitely benefit from higher oil prices. The energy stock remains depressed from pre-pandemic levels and can recover to the $40 per share level for an upside potential of more than 35%. Meanwhile, it provides a yield of about 2.9%. Furthermore, it can raise its dividend again on an improving operating environment.

Parex Resources stock

Higher oil prices will also certainly benefit Parex Resources (TSX:PXT), which is the 10th-largest holding in TSX:XEG and produces oil in Colombia. Importantly, it has a pristine balance sheet with no debt since Q2 2015. Furthermore, it has a proven business model to generate free cash flow, which is a big deal in the energy sector!

Notably, the company has opted to buy back shares with its excess cash instead of paying dividends. Parex Resources plans to repurchase nearly 10% of its outstanding shares this year.

Stock buybacks are a good idea when the energy stock is cheap as it is now. An upside potential of about 46% is possible over the next 12 months!

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.

The Motley Fool owns shares of and recommends Enbridge. Fool contributor Kay Ng has no position in any of the stocks mentioned.

More on Energy Stocks

Arrowings ascending on a chalkboard
Energy Stocks

Beat the TSX With This Cash-Gushing Dividend Stock

Canadian Natural Resources stock is well set up to beat the TSX as it continues to generate strong cash flows…

Read more »

energy industry
Energy Stocks

2 TSX Energy Stocks to Buy Hand Over Fist Now

These two rallying TSX energy stocks can continue delivering robust returns to investors in the long term.

Read more »

green energy
Energy Stocks

1 Magnificent TSX Dividend Stock Down 37% to Buy and Hold Forever

This dividend stock has fallen significantly from poor results, but zoom in and there are some major improvements happening.

Read more »

oil tank at night
Energy Stocks

3 Energy Stocks Already Worth Your While

Here's why blue-chip TSX energy stocks such as Enbridge should be part of your equity portfolio in 2024.

Read more »

Solar panels and windmills
Energy Stocks

1 Beaten-Down Stock That Could Be the Best Bet in the TSX

This renewable energy stock could be one of the best buys you make this year, as the company starts to…

Read more »

Dice engraved with the words buy and sell
Energy Stocks

Is Enbridge Stock a Buy, Sell, or Hold?

Here's why Enbridge (TSX:ENB) remains a top dividend stock long-term investors may want to consider, despite current risks.

Read more »

Gas pipelines
Energy Stocks

If You Had Invested $5,000 in Enbridge Stock in 2018, This Is How Much You Would Have Today

Enbridge's high dividend yield hasn't made up for its dismal total returns.

Read more »

Bad apple with good apples
Energy Stocks

Avoid at All Costs: This Stock Is Portfolio Poison

A mid-cap stock commits to return more to shareholders, but some investors remember the suspension of dividends a few years…

Read more »