Although the TSX lost over 8% in 2022, energy stocks were some of the biggest gainers last year. On top of the fact that most Canadian stocks lost money last year and the fact that the energy industry saw several tailwinds, it’s no surprise that high-quality energy stocks were some of the top performers.
For example, in 2022, Freehold Royalties (TSX: FRU) earned investors a total return of more than 45%, and since it started its rally in November 2020 after the pandemic selloff, investors have earned a total return of over 375%.
Peyto Exploration and Development (TSX: PEY) is another example. In 2022 it earned investors a total return of 54%. And since the start of its rally at the beginning of 2021, investors have earned a total return of more than 320%.
But with the energy industry normalizing in recent quarters. commodity prices coming back down, and now with a potential recession on the horizon, are these TSX energy stocks still worth buying today?
Is this TSX royalty stock worth buying today?
Although Freehold has had a tremendous performance, as it’s recovered over the last few years, gaining nearly 400% and increasing its dividend on seven separate occasions, the stock still offers potential for investors today, especially if you’re looking for passive income.
Freehold is constantly earning tonnes of cash flow, and because it keeps its payout ratio at a conservative level (aiming for 60% of its free cash flow), it has a margin of safety in case energy prices fall significantly.
Although many TSX energy stocks are at risk that commodity prices could decline in a recession, Freehold is a lower-risk investment than many energy producers.
Furthermore, Freehold stock has sold off recently, creating compelling value for investors today. With the stock trading at around $15.50 a share, it trades more than 10% off its 52-week high. Furthermore, at this price its monthly dividend offers a yield of roughly 6.9%.
Freehold is currently trading at an enterprise value (EV) to free cash flow ratio of just 7.9 times, which is slightly below its long-term average and cheaper than its competitors.
Therefore, if you’re looking for high-quality TSX energy stocks to add to your portfolio today, Freehold is certainly worth considering.
A high-quality natural gas producer
Peyto has a much different business model to Freehold, but, nevertheless, is another TSX energy stock you can consider buying today.
First off, because Peyto is a natural gas producer, and a low-cost one at that, it has tonnes of long-term potential. Natural gas may be a fossil fuel, but it’s much cleaner than oil and certainly coal. Therefore, utilizing natural gas as we transition to cleaner energy sources will be crucial for slowing down the impacts of climate change.
In addition, from an operational standpoint, Peyto hasn’t looked this good in years. 2022 was a record year for Peyto earning more than $1 billion in revenue, and in 2023, the TSX energy stock is expected to see sales above $1 billion once again.
That’s not all. Analysts expect Freehold to earn roughly $325 million in free cash flow this year and another $400 million next year. And even after its massive dividend increase, which brought the current yield to 11.5%, it will cost Freehold just $230 million annually to fund the dividend.
Right now, the stock has an average analyst target price of $17.82, a more than 55% premium to where it trades today. Furthermore, although four analysts rate it a hold and the other four analysts rate Peyto a buy, the lowest average target price is $14.75, which still represents a potential return of more than 25%.
Therefore, if you’re looking for high-quality TSX energy stocks that you can buy today and hold for years, Peyto is trading at a compelling valuation.
