It has a been a very strong year for most traditional Canadian energy stocks. Yet there still could be significant upside ahead. Oil prices just jumped over $85 per barrel, and natural gas remains resilient. Given that supply has not kept up with rising demand out of the pandemic, some analysts are arguing that oil could hit over $100. Likewise, natural gas could still double again by early 2022.
At those prices, many of Canada’s top energy producers are gushing free cash flow, and they have tons of optionality on how to allocate excess cash.
However, given climate change, the world is also steadily positioning for a more carbon-neutral future. Consequently, I believe there are some major trends that support owning Canadian renewable energy stocks as well. I think investors could win from both of these themes.
Here are three top Canadian energy stocks (both traditional and renewable) that each look cheap and attractive today.
A top Canadian oil stock
Cenovus Energy (TSX: CVE)(NYSE: CVE) has had a very good recovery in 2021. It is up nearly 90% year to date. Despite energy prices reaching the same height as they did in 2014, Cenovus still trades at more than half the valuation it did back then.
Cenovus can break even when oil is at US$36 per barrel. That means today, it is spewing free cash flow. In fact, last quarter, this Canadian stock generated $1.3 billion of free cash flow. This coming quarter should be even better given that oil prices were even higher. After significantly reducing its debt this year, management believes it could reach a free cash flow yield of around 27% in 2022.
That means every share you own is essentially yielding 27 cents in cash. Cenovus will likely continue to reduce its debt profile with that cash. However, if this market remains strong, this Canadian stock could also return significant amounts of cash back to patient shareholders.
A stock for the energy transition
An interesting way to play the transition between traditional energy and renewables is through Enbridge (TSX: ENB)(NYSE: ENB). Certainly, owning one of the largest pipeline networks in North America has made it disdained by many environmentalists. However, right now, and likely for many decades ahead, its pipelines will be economically essential for society.
What I like is that this Canadian stock has also been investing heavily into natural gas infrastructure. With less carbon intensity to oil, natural gas is considered a reasonably efficient bridge-fuel for power generation and heat. Likewise, Enbridge has a growing portfolio (already five gigawatts) of wind and solar power projects.
With a handsome dividend of 6.3%, this Canadian stock is still relatively cheap. Given a number of large projects coming online, Enbridge should enjoy a nice jump in cash flows and decent dividend increases going forward.
A top Canadian renewable stock
In contrast to the traditional energy sector, Northland Power (TSX: NPI) is a very unique way to play long-term renewable power trends. It has renewable power and utility operations across North America, Central America, and Europe. It has unique expertise at developing and operating off-shore wind projects.
Right now, temporary results are lagging to some extent, because it is investing heavily to grow its portfolio. With an enterprise value-to-EBITDA ratio of 11, this Canadian stock looks relatively cheap. Yet the company is looking to more than double its power capacity over the next five years. While this strategy unfolds, investors get to enjoy an attractive 3% dividend for their patience.
