The energy sector outpaced broader markets by a wide margin in 2022. But the drawdown in crude oil prices has dragged valuations of energy stocks lower year to date. Despite a sluggish macro environment and the threat of an upcoming recession, oil prices are forecast to remain elevated in the near term due to higher demand from China and geopolitical tensions.
So, let’s see which TSX energy stocks you should consider buying right now.
Is Suncor stock a buy or a sell?
One of the largest energy stocks on the TSX, Suncor (TSX:SU) has taken investors on a roller-coaster ride in the past decade. Shares of the company rose from $30 in March 2013 to a decade high of $55 in August 2018.
Suncor’s stock price then fell to $15 when COVID-19 wreaked havoc on global oil demand and is currently trading at $40. At the current price, Suncor offers investors a dividend yield of 5.1%.
Similar to most energy stocks on the TSX, Suncor cut its dividend by 55% in 2020 as earnings fell off a cliff. However, these quarterly payouts have since increased by 148% to $0.52 per share.
A rebound in oil prices allowed Suncor to improve its balance sheet and reduce its debt in the last two years. Suncor also undertook a strategic review of its assets as an activist investor called for widespread changes following the company’s poor performance amid COVID-19.
Currently priced at six times forward earnings, Suncor stock is quite cheap. But its adjusted earnings are also projected to narrow from $8.34 per share in 2022 to $6.63 per share in 2020.
Due to its attractive multiples, Suncor stock is trading at a discount of more than 30% compared to consensus price targets. After adjusting for its dividend, total returns will be closer to 35%.
But there is another TSX energy stock which is a much better bet compared to Suncor. That company is Canadian Natural Resources (TSX:CNQ).
Canadian Natural Resources stock
One of the most popular dividend stocks on the TSX is Canadian Natural Resources. While CNQ is part of a cyclical sector, it has increased dividends by 20% annually in the last 23 years. Currently trading 17% below all-time highs, CNQ stock offers you a dividend yield of 5%.
The largest energy company in Canada, CNQ produces approximately one million barrels of oil equivalent each day. With almost 30 years of reserves, CNQ’s low cost of production allows it to generate profits even when oil prices are lower.
In 2022, Canadian Natural Resources increased adjusted funds flow by 44% year over year to almost $20 billion, while free cash flow stood at $11 billion. So, CNQ stock is priced at seven times trailing cash flows, making it among the cheapest energy stocks in the country.
Its enviable cash flows in the last four quarters have allowed the company to reduce net debt by $3.4 billion and end the year with net debt of $10.5 billion.
Once Canadian Natural Resources reduces net debt to below $10 billion, it will return 100% of free cash flow to shareholders. Right now, around 50% of free cash flow is returned to investors.
CNQ stock is also priced at a discount of 30%, given consensus price target estimates.
