Global energy investors celebrated after the oil cartel announced a massive production cut this week. Many Canadian energy producers are fundamentally strong and could turn higher as the most important trigger—oil prices, is now activated in their favour. After massive earnings growth in 2022, the year 2023 could replicate last year’s feat if oil prices remain buoyant.
But if you have to choose between the bigwigs like Canadian Natural Resources (TSX:CNQ) and Suncor Energy (TSX:SU), which one would be a better bet?
CNQ or SU stock?
Canadian Natural Resources is the country’s biggest energy producer, at a market cap of $87 billion. CNQ stock has returned 6% in the last 12 months and 420% in the last three years. The oil producer aims to produce 1.3 million barrels of oil equivalent per day (boepd), with 75% of liquids-weighted production. Its low-cost production and exposure to premium markets facilitate relatively superior margins, giving it an edge over its peers.
Suncor Energy operates throughout the value chain, from oil production and refining to retailing. It plans to produce 755,000 boepd this year. SU stock has returned 13% in the last 12 months and a mere 125% in the last three years.
Suncor Energy has been a long-term laggard compared to TSX energy stocks on average, mainly because of its operational issues. Refinery downtime and worker deaths at its facilities have weighed on the stock in the last few years.
Interestingly, both Suncor and CNQ have managed to grow their free cash flows by 38% compounded annually in the last five years.
Increased focus on shareholder returns and deleveraging
Most of the Canadian oil and gas sector will achieve their respective debt targets this year, and shareholder returns remain the priority for 2023. Both Canadian Natural and Suncor are currently allocating 50% of their free cash flows to buybacks and dividends, and the rest to debt reduction. While CNQ has more financial might to boost total returns, it has also been more consistent with buybacks and dividends.
Canadian Natural has kept its dividend growth streak intact for the last 23 consecutive years, even during the pandemic. When energy companies were suspending shareholder payouts amid mounting uncertainties, CNQ had better visibility of its earnings growth and, thus, managed to raise dividends. In comparison, Suncor Energy trimmed its dividend during the pandemic to retain cash. CNQ currently yields 4.8%, while SU yields 5.2%.
At the end of 2022, CNQ had net debt of $11.6 billion and Suncor $14 billion. Undoubtedly, they have done a fantastic job bringing the debt burden down significantly. At the end of Q4 2022, both had leverage ratios around 0.5x, down from beyond 3x in 2020.
Valuation
CNQ stock is currently trading at a price-to-cash flow of 4.5x compared to SU’s 3.5x. The prior’s premium valuation indicates superior growth prospects and higher expectations of investors. Though it looks relatively richly valued, the premium is justified. CNQ will likely outperform SU in 2023 and beyond, mainly based on its strong execution and solid asset base. Its stellar balance sheet and an increased focus on buybacks will likely aid total shareholder returns.
