We are just a few weeks away from the Canadian energy companies starting their Q1 2022 earnings season. The upcoming quarterly performance will most likely provide another major impetus for their stocks. TSX energy stocks are already sitting on mammoth gains for the year amid rallying oil and gas prices. It remains to be seen how high these energy names go after their Q1 earnings.
Canadian energy sector ahead of Q1 2022 earnings
Crude oil prices are 70% higher than last year, while natural gas prices have gained an eye-popping 190% in the same period. So, oil and gas companies have been in the sweet spot since mid-2020. Rallying energy prices substantially boosted energy companies’ earnings all this while. Interestingly, the majority of these incremental earnings went to repay debt or increase shareholder returns.
It will be highly interesting to see how quickly these energy companies deleverage their balance sheets. Apart from the steep earnings growth, the debt repayments and management commentary towards dividend hikes will likely boost their stocks.
Top TSX energy stocks
Among the early reporters, Whitecap Resources (TSX: WCP) will release its numbers on April 28. It has already raised its Q1 2022 dividend by 33% and will pay $0.36 per share annually. Whitecap aims to boost its 2022 production by 17% year over year. So, higher production and sky-high prices will likely notably lift its earnings this year.
Even after allocating higher towards capital expenditure, these companies are flush with cash. Notably, WCP expects a three-year cumulative free cash flow of $3.6 billion amid higher oil and gas prices. This will go towards debt repayments and dividends.
WCP stock has gained 94% in the last 12 months. It yields a decent 3.2% at the moment. The stock will likely keep trading strongly with solid earnings growth potential, improving balance sheet, and favourable industry dynamics.
Another star performer, Baytex Energy (TSX: BTE)(NYSE: BTE), will also report on April 28. BTE stock has soared 425% since last year and is still going strong. Investors might cheer its earnings growth this quarter, given the low base in Q1 2021. According to analysts’ estimates, WCP will report earnings of $0.11 per share in Q1 2022 relative to a loss of $0.06 per share in Q1 2021.
The company expects its best case to generate $700 million in free cash flows this year, assuming a WTI average of $95 a barrel. Such steep free cash flow will notably bring down its debt position and make way for dividends.
Canadian energy giant Canadian Natural Resources (TSX: CNQ)(NYSE: CNQ) plans to release its Q1 numbers early next month. Apart from the steep earnings growth, its allocation of the excess cash flow will be more important for investors. It has already raised its dividend by 50% this year to $3 per share. The stock has gained 120% in the previous 12 months.
For 2022, the company is focused on maintaining its capital discipline. Thus, more deleveraging could be seen in the case of CNQ as well, which could be followed by more cash distribution.
Bottom line
Note that oil and gas prices could remain strong in the short to medium term, as the U.S. and Europe consider completely banning Russian energy. Though it seems implausible at the moment, a large portion of that could go away in the next few months. So, already tight energy markets could see the demand and supply imbalance further deteriorating. Canadian energy names might reach their free cash flows and deleveraging targets sooner in that case.
