As oil and gas prices have fallen dramatically over the last year, so have energy stocks. They spectacularly rode the wave higher last year only to come crashing down in recent months. But has this altered the outlook for energy stocks? Or has it created some truly undervalued energy stocks to buy today?
In this article, I discuss two energy stocks that are too cheap to ignore.
Canadian Natural Resources
Canadian Natural Resources Ltd. (TSX:CNQ) is a $42 billion Canadian oil and gas company. Its assets consist of a diversified portfolio of high-quality natural gas, crude oil, and upgrading assets. Importantly, these assets are long life assets, and as such, the company’s reserves are expected to last 32 years.
Crude oil has fallen 35% from its 2022 highs of more than $120. Canadian Natural Resources stock has fallen a mere 7.5% in this same time period. The fact is that CNQ stock remains undervalued due to the sheer earnings and cash flow power of this energy stock. In 2022, adjusted funds flow increased 44% to $19.8 billion and free cash flow increased to $10.9 billion.
The company has been a strong cash flow generator for many years. This, in turn, has led to strong dividend payments and dividend growth. In fact, in the last 20 years, its dividend has grown at a compound annual growth rate (CAGR) of 25%!
Today, Canadian Natural Resources stock is trading at depressed multiples of 4.9 times cash flow and 2.3 times book value despite its strong cash flow growth rates and return on equity. Also, its dividend yield is a very generous 4.47%. All of this makes CNQ stock a cheap energy stock to buy today.
Suncor Energy stock
With a dividend yield of just above 5%, and depressed multiples of 3.1 times cash flow and 1.4 times book value, Suncor Energy Inc. (TSX:SU) stock is screaming value today. But what caused this former Canadian integrated oil and gas company to fall from grace? You see, Suncor stock was once an investor favourite that could do no wrong. Has it really fallen so far off the tracks, or is this a case of altered perception more than anything else?
Well, as is usually the case, the answer is grey. In truth, Suncor has had its issues. For example, its safety record has not been great. On top of this, there have been some operational deficiencies that have contributed to these safety issues and drove up costs. However, as it often happens in the stock market world, the shift in investors’ perception of Suncor was far worse than the reality.
You see, Suncor remains an oil and gas powerhouse, with a well-diversified business and strong and steady cash flows. In 2022, the company has continued to deliver strong results. In fact, Suncor posted record results. This was driven by strong oil prices as well as strong crack spreads.
So, Suncor generated adjusted funds flow of more than $18 billion in 2022, 77% higher than in 2021. This is yet another year of strong cash flows from Canada’s premier integrated oil and gas company. As a result of this consistently strong cash flow profile, Suncor’s dividend has increased at a compound annual growth rate of 17% in the last 20 years. This is a phenomenal track record and one that has made many shareholders extremely happy and wealthy.