The once-disdained oil and gas sector notably outperformed broader markets in the last few years. While the TSX Composite Index has returned 44% since the pandemic crash three years back, TSX energy names, on average, have returned 300% in the same period. Notably, even this outperformance falls short when we compare that with some of the mid-cap TSX energy names.
TSX energy stocks outperform
For example, Athabasca Oil (TSX:ATH) returned 2,200% in the last three years thanks to its record-high financial growth. $10,000 invested in ATH stock after the pandemic crash would have created a reserve of around $226,000 today. Agreed, that the uncertainty then was quite defeating, and it’s easy to judge in hindsight. But many took those risky bets and are currently sitting on handsome gains.
Likewise, peers NuVista Energy (TSX:NVA) and MEG Energy (TSX:MEG) have returned 1,800% and 1,220% in the same period, respectively. Note that many Canadian small-cap oil and gas producers became mid-caps recently due to their handsome growth all around.
Crude oil almost doubled in the first half of 2022, which came as a big boon for energy producers. Even after seeing prices rise, oil and gas producers did not deploy higher capital to raise production. This capital discipline played out well and drove immense financial growth. The additional cash flow was utilized to repay debt, which notably improved their balance sheet strength.
Earnings growth and an increased focus on shareholder returns
In case of Athabasca Oil, it had net debt of $48 million at the end of the fourth quarter (Q4) of 2022, among the strongest leverage positions for the company ever. It repaid $170 million of debt last year. For 2022, Athabasca Oil posted free cash flows of $161 million, indicating a remarkable increase from $102 million in the earlier period.
This has been the theme across the sector. So, due to a significant drop in the debt balance, Athabasca Oil will likely save millions on debt-servicing costs in 2023 and beyond, eventually increasing its profitability.
Coming into 2023, many energy companies have substantially paid back their debts. So, their priority for the year now is shareholder returns. Canadian energy producers are more inclined toward share buybacks, indicating that shares are undervalued.
For example, NuVista Energy aims to invest 75% of its free cash flows for shareholder returns this year. It repurchased 13.5 million shares for a total cost of $157 million. As the number of total outstanding shares decreases with buybacks, the company’s per-share earnings increase. Plus, each share becomes more valuable, and shareholders now will receive higher dividends, even if the absolute amount is kept constant.
NuVista is a gas-weighted energy producer, and the stock has been down 22% in the last six months. The ongoing weakness could be an opportunity for buybacks.
Similarly, MEG Energy repurchased 2.8 million shares in January 2023 after buying back 20.6 million shares in 2022. Superior financial growth is expected to finance aggressive buybacks for the rest of the year, likely boosting its share price.
Conclusion
Many energy names have seen a similar weakness recently amid the drop in oil and gas prices. However, they might run higher again, as energy commodities are expected to rise on supply woes later this year.
Their correlation with oil and gas prices indeed makes them some of the risky names. However, the sector as a whole looks attractive due to its fundamental strength. Earnings-growth visibility and strong balance sheets remain the highlights for the energy sector. Plus, the buyback activity and increased allocation of excess cash to shareholder returns will likely create considerable shareholder value.
