Better Buy: Suncor Stock or Canadian Natural Resources Stock?

Suncor and Canadian Natural Resources are benefitting from higher oil prices. Is one undervalued today?

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Suncor (TSX:SU) and Canadian Natural Resources (TSX:CNQ) are giants in the Canadian energy sector. Oil prices have started to recover from a market correction, and investors are wondering which TSX oil producer might be good to buy right now.

Suncor

Suncor trades for close to $41.50 at the time of writing. That’s down from the 2022 high around $53.50 the stock reached last June.

Investors who had the courage to buy Suncor near the 2020 low around $15 are still sitting on some nice gains, but long-term holders of the stock are wondering why Suncor has underperformed its peers through the post-pandemic recovery. Suncor trades for pretty much the same price it did in late January 2020 before the pandemic crash. Other oil sands producers are up as much as 100% from their early 2020 levels.

Suncor cut its dividend by 55% in the early weeks of the pandemic, while other major producers held their payouts steady. The move upset loyal investors who assumed the dividend would be safe. Suncor had maintained the distribution in previous times of turbulence in the oil market. The pandemic, however, posed a new problem in that the price of oil dropped due to a plunge in fuel demand, not due to a surplus of supply. This meant Suncor’s refining and retail operations also took a hit. Normally, the downstream businesses provide a good revenue hedge when oil prices fall.

Looking ahead, Suncor should perform better. A new chief executive officer is at the helm and Suncor has made good progress on plans to monetize non-core assets. The balance sheet is now in good shape and an aggressive share-buyback plan over the past two years has reduced the float.

In addition, the board has increased the dividend to surpass the payout amount that was in place before the 2020 cut. At the time of writing, investors can get a 5% annualized yield.

Canadian Natural Resources

CNRL is Canada’s largest energy company with a current market capitalization near $90 billion. The stock trades for $82 at the time of writing. This is not far off the 12-month high around $88 and about double the price CNQ fetched right before the pandemic.

CNQ has a diversified revenue stream coming from oil and natural gas production. The oil assets are spread out across various types, including oil sands, conventional heavy oil, conventional light oil, and offshore oil production.

CNRL typically owns 100% of its production operations. The strategy carries higher risk, but 100% ownership also gives management the flexibility to shift capital around the various assets to capitalize on the best market opportunities.

CNRL raised the dividend in each of the past 23 years with a compound annual growth rate of better than 20%. In addition, the board began handing out bonus dividends in 2022. Investors received a special payout of $1.50 per share last August. If oil prices continue to trend higher, more bonus payouts could be on the way.

At the time of writing, the base dividend provides a 4.4% yield.

Is one a better pick right now?

Suncor and CNRL pay attractive dividends that should continue to grow if oil holds its current level or moves higher in the coming years.

CNRL is arguably the safer bet and has delivered better returns over the past three years. That being said, Suncor might be undervalued today, and investors get paid well to wait for the turnaround. If you are an oil bull, I would probably split a new investment right now between the two stocks.

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 Andrew Walker has no position in any stock mentioned.

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