The economy so far hasn’t turned out as bad as many would have expected. This implies that the energy demand will likely remain steady in 2023, boosting energy stocks. However, as energy prices are highly volatile, investors should invest in companies with the financial strength to withstand a downturn.
Here, I’ll focus on two fundamentally strong Canadian stocks that have the financial strength to easily navigate the downturn in the sector and deliver consistent returns.
A pure-play renewable energy company
My first pick is from the renewable energy space. The ongoing transition towards green energy, increased investment in the sector, and favourable government policies imply that the demand for renewable energy could continue to grow.
Within the renewable energy sector, Brookfield Renewable Partners (TSX: BEP.UN) looks attractive near the current levels. This pure-play renewable energy company has an installed capacity of 25,400 megawatts. Moreover, it has a development pipeline of 110,000 megawatts of renewable power assets.
Impressively, its diversified renewable power assets generate resilient cash flows. Furthermore, its assets have a long life and low operating cost. In addition, it benefits from long-term contracts with creditworthy counterparties. All these enable the company to consistently deliver double-digit average annual FFO (funds from operations) growth.
Moreover, more than 90% of its power output is contracted to the public power authorities, load-serving utilities, and industrial users. In addition, its power-purchase agreements, or PPAs, are long term (with a weighted average remaining life of approximately 14 years) and have protection against inflation. These PPAs add visibility over future cash flows and provide organic growth opportunities.
Thanks to its solid cash flows, Brookfield Renewable has consistently enhanced its shareholders’ returns through higher payouts.
Brookfield Renewable’s balance sheet remains strong with no near-term maturities. Also, most of its debt is fixed rate, offering protection against rising interest rates. The company aims to deliver 12-15% total long-term returns to its shareholders, making it an attractive investment in the energy sector.
A leading energy infrastructure company
Energy infrastructure company Enbridge (TSX: ENB) is an all-weather stock to own. Its highly diversified revenue sources (over 40 revenue streams), high-quality asset base, contractual arrangements to lower price and volume risks, and inflation-protected adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) position it well to deliver solid returns amid all market cycles.
This large-cap energy company also benefits from continued investments in conventional and renewable assets, new growth projects, and a multi-billion secured capital program.
Thanks to its resilient cash flows, the company has consistently paid and raised its dividends to enhance its shareholders’ returns. It also increased its dividend, even amid the pandemic when most energy companies lowered their payouts, which shows its financial strength.
The high utilization of its assets, utility-like business model, and diversified cash flow streams position it well to deliver strong financials. Enbridge increased its dividend for 28 years and could continue to grow its annual payments on the back of its growing distributable cash flows. Further, by investing in Enbridge, investors can earn a well-protected dividend yield of 6.76%.
