Better Buy: Suncor Energy Stock or Canadian Natural Resources

Suncor and Canadian Natural Resources are generating strong profits. Is one undervalued?

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Energy stocks continue to benefit from the rebound in oil and natural gas prices. Investors who missed the rally off the 2020 lows are wondering which Canadian energy producers still appear undervalued and are good to buy today for passive income and total returns.

Let’s take a look at Suncor Energy (TSX:SU) and Canadian Natural Resources (TSX:CNQ) to see if one of these stocks deserves to be on your buy list.

Suncor

Suncor just announced that it plans to keep its retail operations rather than monetize the group. The market didn’t like the news and sent the stock price lower. Suncor put the division under review after a new chief executive officer came in earlier this year as part of a change of management, partly triggered by pressure from an activist investor.

In the end, the board said investors would be better served by retaining the retail business, which includes roughly 1,500 Petro-Canada service stations. The company now intends to optimize the network by expanding the strategic partnerships across the portfolio in areas, such as food services and convenience stores, along with loyalty programs and energy transition. Petro-Canada represents 18% of Canadian retail fuel sales.

Suncor’s integrated business model that includes production, refining, and retail operations has historically served investors well by providing a good hedge when oil prices dipped as a result of surplus supply. All three segments took a hit during the early months of the pandemic, however, due to the unprecedented crash in global fuel demand.

The board tested the waters on potential interest from buyers for the retail segment. It is possible that the company didn’t think it would unlock enough value through a disposition of the group.

Suncor recently raised the quarterly dividend by 11% to $0.52 per share. This is on top of a 12% put in place earlier in the year, and a 100% boost in late 2021. Suncor slashed the payout by 55% at the start of the pandemic to protect cash flow. The decision upset investors and the stock still remains out of favour when compared to the performances of its peers.

Suncor stock trades near $46 per share at the time of writing and offers a 4.5% dividend yield. The share price was around $43 before the pandemic when West Texas Intermediate (WTI) oil was about US$60 per barrel. Today, WTI oil is near US$79 per barrel. With fuel demand soaring, the stock looks undervalued.

Canadian Natural Resources

CNRL trades for $81 per share. The stock was around $40 per share before the pandemic, so investors who held on for the ride have enjoyed solid gains. The board continued to raise the dividend in 2020 and 2021 and has increased the payout significantly in 2022. CNRL bumped the quarterly dividend by 28% in the spring and recently announced another 13% increase to $0.85 per share. In addition, investors received a bonus dividend of $1.50 per share in August.

CNRL operates production across a wide swath of the hydrocarbon spectrum with oil sands, conventional heavy oil, conventional light oil, offshore oil, natural gas liquids, and natural gas sites. The company is best known for the oil side of the business, but CNRL is also a major natural gas producer. This segment offers solid growth potential in the coming years, as international demand for Canadian natural gas is expected to grow.

Investors who buy the stock at the current price can get a 4.2% dividend yield.

Is one a better bet?

Suncor probably has more upside potential if management succeeds in driving strong revenue growth from the downstream assets while improving production operations. CNRL is more likely to put additional cash in the pockets of shareholders through special dividends, as it continued to reduce net debt.

I would probably split a new investment between the two stocks today.

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 CDN NATURAL RES. The Motley Fool has a disclosure policy. Fool contributor Andre Walker has no position in any stock mentioned.

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