1 TSX Energy Stock to Watch as Crude Oil Rallies

One TSX energy stock is rallying as crude oil surges after the output cut.

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Canadian energy stocks are rising with oil prices

As crude oil corrected by around 18% in mid-March, TSX energy stocks followed and recorded some of the fastest declines. However, the major oil cartel fused new life in energy markets over the weekend and brought a respite for investors. OPEC+ (Organization of Petroleum Exporting Countries plus Russia) announced a surprise output cut of 1.2 million barrels of oil per day for 2023.

What’s next for TSX energy stocks?

Crude oil prices move based on demand and supply. As the demand is expected to continue to increase while supply is being squeezed with new cuts, the equation supports higher oil prices. As a result, oil prices soared more than 5% on Monday. Given the output cut, Goldman Sachs raised its price target for crude oil from US$90 to US$95 a barrel for the end of the year.

Oil prices have come down significantly from around US$130 a barrel in mid-2022 to around US$70 this month. As the US Strategic Petroleum Reserves (SPR) releases contributed to supplies last year, oil and energy stocks witnessed notable downward pressure. Now, as the SPR is at multi-decade lows, the ball is in OPEC’s court. With the new production cuts and further tightening of supplies, OPEC has demonstrated its hold in the market, making it harder for the US to refill its strategic reserves.

Energy stocks and investors will be overjoyed after a dry spell. TSX energy names are currently trading flat compared to last year, even when oil prices have lost 20% in the same period. The recent rise in oil will likely be followed by a remarkable surge in fundamentally strong energy equities.

Exploration and production companies have achieved notable strength since the pandemic with their capital discipline. The debt reduction has been massive, making them much stronger on the balance sheet front. Almost the entire sector is sitting on a hoard of cash, which will be used for share repurchases and dividends in 2023 and beyond.

#1 TSX energy stock

One name that particularly looks attractive is Canadian Natural Resources (TSX:CNQ). Its correlation with oil prices and potential earnings boost will likely send the stock higher.

It has a diversified product base that includes synthetic crude oil, thermal oil, natural gas, and liquids. Its oil sands assets have a breakeven price lower by approximately 40% compared to peers and exposure to the premium-trading Edmonton par benchmark. Almost 36% of its natural gas is sold in export markets, which obtains higher realized prices and helps margins.

CNQ’s deleveraging has remarkably improved its balance sheet strength lately. Its leverage ratio has fallen from close to 4x at the end of 2020 to 0.5x at the end of 2022. As a result, the company announced its plans to allocate 100% of its 2023 free cash flows to shareholder returns this year. Last year, it spent around $10 billion on buybacks and dividends. So, investors can again expect higher dividends and better returns backed by aggressive share repurchases. CNQ currently yields 4.8%.

In tip-top shape

CNQ is a high-quality bet in the Canadian energy space. Its operational efficiency and financial power differentiate it from its peers. Now that oil prices have gained momentum, CNQ stock will likely mimic them and realize more shareholder value.  

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool recommends Canadian Natural Resources. The Motley Fool has a disclosure policy. Fool contributor Vineet Kulkarni has no position in any of the stocks mentioned.

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