2 UNDERVALUED TSX Energy Stocks That Offer Massive Growth Prospects

Is it too late to get on board TSX energy stocks?

Upwards momentum

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Market pullbacks are excellent times to look for undervalued names. While broader markets seem to have started reviving after a break recently, TSX energy stocks still seem to have been weighed down by lower oil. However, some names are trading way below their fair values and are available at a large discount compared to peers. Here are two of them that look undervalued and offer strong growth prospects.    

Vermilion Energy

While TSX energy stocks struggle to move higher amid lower oil prices, Vermilion Energy (TSX:VET)(NYSE:VET) is trading close to its record highs. VET stock has gained 250% since last year and has outperformed peers by a big margin.

Interestingly, despite such a vertical surge, VET stock currently trades at 1.3 times its enterprise value-to-cash flow. Its price-to-earnings multiple comes around six times, which is much lower than the industry average.

Thanks to sky-high oil and gas prices earlier this year, energy stocks like Vermilion reported superior financial growth compared to last year. Energy companies are flush with cash with such windfall gains, even after capital expenses and debt repayments.

Vermilion has also been one of them. Its free cash flow growth this year has facilitated faster debt repayments and shareholder dividend hikes. Notably, this could continue for the next few quarters, as oil prices are still higher than last year. Balance sheet improvement and more dividend hikes make it some of the strong bets among TSX energy stocks.

Vermilion derives almost 30% of the total revenues from Europe. Its Europe exposure and rising natural prices in the continent could be its key growth trigger going forward. A discounted valuation, strong earnings growth prospects, and balance sheet strength could continue to unlock shareholder value.

MEG Energy

MEG Energy (TSX:MEG) stock has been trading weak and has lost 30% since June. The stock has come down due to a weaker pricing environment and has underperformed its peers. However, MEG stock is currently trading at an appealing valuation, especially after the correction.

MEG reported net earnings of $0.72 per share for the second quarter of 2022, representing a solid 227% growth year over year. In addition, its free cash flows jumped to $324 million during the quarter compared to $113 million in Q2 2021.

The financial growth from MEG was quite on the expected lines in line with the sector. Like peers, MEG has used this free cash flow to repay debt and improve its balance sheet strength. MEG Energy does not currently pay dividends. However, if it continues to repay debt at the same pace, we will likely see dividends from MEG in the next few quarters. 

Canadian oil and gas sector has seen remarkable deleveraging since the pandemic, which has made them some of the investors’ favourites.

MEG stock has returned 124% in the previous 12 months. The stock still does not look overvalued, despite such an epic ascent. It is currently trading four times its EV-to-cash flow ratio and six times its earnings.

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 recommends VERMILION ENERGY INC. Fool contributor Vineet Kulkarni has no position in any of the stocks mentioned.

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