The energy sector is chock full of high-yield stocks. Whether you’re looking at oil explorers, refiners, or (most of all) pipelines, you’ll find yields well north of 5%. Among pipelines, 6% is quite common. With oil prices still relatively strong, there are many good opportunities in the oil and gas sector.
In this article, I’ll explore three oil and gas stocks: two that I would buy and one that I would avoid.
Buy: Suncor Energy
Suncor Energy (TSX: SU) is an oil stock that I’ve owned in the past and made decent money on. In principle, I have no opposition to owning it today. I just have other ideas I like better.
Suncor is an oil and gas company involved in exploration, production, and gas stations. Its gas station chain (Petro-Canada) is among the largest in Canada. It had a great year in 2022, delivering large increases in revenue, net income, and free cash flow.
Why do I like Suncor right now?
Because it hasn’t been bid up quite as much as its peers. Suncor, like most oil stocks, has risen a lot over the last year. However, it’s a little behind the average Canadian oil stock in the trailing 12-month period. The company has experienced numerous safety issues, which have dimmed sentiment toward the stock. It also faced pressure from an activist investor to unwind its gas station business. However, its actual earnings have been about as good as those of its competitors. For that reason, I consider Suncor a high-yield oil stock worth owning.
Buy: Enbridge
Enbridge (TSX: ENB) is an oil stock with a 6.55% dividend yield. That’s incredibly high, and it may be sustainable. Enbridge has very long-term contracts to ship oil for its customers. Most of its contracts/leases are for 10 years or longer, so ENB tends to lock in high levels of recurring revenue. This results in stable yet growing earnings over time.
Over the last 10 years, Enbridge has increased its dividend by 9% per year. That is pretty high compounded growth rate in dividends. If Enbridge can keep it up over the next decade, then investors who buy today may eventually enjoy a double-digit yield on cost!
Avoid: Kinder Morgan
The one energy stock I’d avoid is Kinder Morgan (NYSE: KMI). This company is a pipeline like Enbridge, but it does not have Enbridge’s revenue resilience. Its earnings tend to rise and fall with oil prices much more than ENB’s do. This resulted in very strong performance in 2022 but is holding back performance this year, when oil prices are just “moderately high” — not truly rallying, like they did last year.
This isn’t to say that I actively dislike Kinder Morgan stock. I just find it compares poorly to Enbridge. It doesn’t have the same amount of locked in revenue that ENB has, and that fact really shows in the company’s earnings. It is possible that KMI will outperform ENB long term, but it will likely give investors a more volatile ride, whether its total return is higher or lower.
For this reason, I think that Enbridge is the kind of pipeline stock that most investors would be comfortable owning, while Kinder Morgan is not.
