Warren Buffett-led Berkshire Hathaway reduced its exposure to the energy sector post-pandemic. However, the last quarter was an exception. In March, the conglomerate aggressively bought 118 million shares of Occidental Petroleum, taking its total holding to 136 million of the total outstanding shares.
Notably, OXY stock has been up more than 110% in the last 12 months. Perhaps many energy stocks still offer handsome growth potential, driven by higher oil prices and their superior earnings growth prospects. So, if you think Buffett is late to the party, that might not be the case.
Energy stocks might continue to shine
Interestingly, crude oil has rallied 60% in the last 12 months. Though it has fallen recently from US$130 per barrel to close to US$100, it is still trading far higher than last year. As a result, energy companies have been seeing and will most likely continue to see windfall gains.
Canadian energy companies have seen a flurry of debt repayments and share buybacks. Their superior free cash flow growth allowed faster debt repayments and dividend increases in the last few quarters.
None of the previous oil rallies achieved such deleveraging for the Canadian oil and gas sector. Most importantly, despite aggressive debt repayments and cash distribution to shareholders, many energy producers are still sitting on excess cash.
Crude oil prices could keep trading at elevated levels, mainly because of the faster-increasing demand and very gradually increasing supply. Even if the U.S. releases a million boe/d of oil from its SPR as announced last week, it will not contribute significantly to increasing the supply in the short to medium term.
Last week, OPEC+ also agreed to a minute increase in supply that will boost production to 432,000 boe/d since May. However, with oil and gas storage tanks at lows, a serious supply crunch looks inevitable amid re-openings.
While that stokes global inflation, energy stocks could see more strength. Notably, Canadian energy stocks look discounted, even at current levels, indicating significant growth potential. So, if you have avoided energy so far, you have not missed the bus yet.
Here are some Canadian energy names you can consider.
Top TSX energy stocks to buy
The country’s biggest energy company Canadian Natural Resources (TSX:CNQ)(NYSE:CNQ) reported a net income of $7.6 billion in 2021 against a loss of $435 million in 2020. This was its highest annual profit ever. The stock has returned a notable 100% since last year.
Oil’s record prices in Q1 2022 indicate another quarter of higher earnings growth for companies like CNQ. In addition, its strong balance sheet, stable dividend profile, and discounted valuation will likely fuel the stock further higher.
Baytex Energy (TSX:BTE)(NYSE:BTE) stock has been up a massive 300% in the last 12 months. The company forecasts free cash flows of $2.8 billion through 2025 at US$75-a-barrel WTI oil. So, with oil’s current levels, Baytex might reach its target much faster.
This indicates more potential for cash transfer to shareholders in the form of dividends or buybacks. Like in 2021, the energy sector could continue to outperform broader markets and expand shareholder wealth this year as well.