Fellow Fools,
We Canadians need not stray far from home to invest in energy stocks (unlike IT and healthcare companies). Hundreds of Canadian stocks exist that could scratch the itch.
Frankly though, many Canadian energy companies don’t look like good investments when stacked up against our Foolish investing principles. They fall too far out on the speculation end of the spectrum, and the businesses exist through the kindness of strangers – basically, the hope that external financing will see them through.
Still, we do have a good number of energy companies that have cleared the speculative stage. And when we consider the “blue chips,” at least when it comes to oil production, two stocks stand out.
Source: Getty Images
Suncor and CNQ Are Canadian Juggernauts With 1 Big Risk
With market capitalizations of C$82 billion and C$51 billion respectively, Canadian Natural Resources (TSX:CNQ) and Suncor (TSX:SU) aren’t just two of the biggest companies in the Canadian energy sector, they’re two of the biggest in the entire Canadian market.
So generally speaking, a decision to invest in a Canadian energy production company starts here.
Thing is, these two are bound by a common element that’s likely to be responsible for the majority of their performance in the years ahead.
There’s no getting around the fact that it’s unlikely investors will make money with either stock if the price of oil doesn’t cooperate.
But let’s assume a static price of oil as our base-case scenario and remove this macro dynamic, – though significant – from consideration.
Which Stock Is the Better Buy?
Historically, it’s been tough to differentiate between Suncor stock and Canadian Natural Resources (which I’ll just call CNQ from here). This undoubtedly has much to do with their shared reliance on the price of oil cooperating.
However, as the chart below indicates, since each stock reached its pandemic-related lows, CNQ has been the clear winner, at least in terms of the total return (dividends included) realized by investors.
Difference Between the Businesses
In a sea of variables, and at risk of oversimplifying, let’s consider two data points that somewhat differentiate the two companies and get at the performance discrepancy.
First, operating margin, which is a gauge of a company’s profitability.
CNQ’s most recently reported operating margin was 32.7%.
Suncor’s, 26.7%.
But what’s most interesting is that in 2019, the year before the pandemic took hold, CNQ’s operating margin was 24.2% and Suncor’s 5.4%.
One take on this is that CNQ is the more stable (ie. the better business) of the two. And when it comes to investing in the energy sector, given the reliance on already volatile commodity prices, running with quality is a better fit for most.
This variability might be explained by a difference in business models. You see, CNQ is what’s known as an upstream producer. That is, it produces the commodity – oil and natural gas – and then sends it into the world.
Suncor is an integrated producer that owns upstream and downstream assets. Suncor both produces and processes (refines) the commodity, and this adds a layer of complexity that’s not present in the CNQ story.
Here’s the other data point:
Insiders at CNQ own $1.9 billion worth of the company’s stock …. with Executive Chairman and founder Murray Edwards accounting for about $1.6 billion of that.
Suncor insiders own a mere $17.4 million worth of company stock.
This doesn’t have to be any more complicated than considering, based on that fact alone, which company would you rather put your hard-earned savings behind?
Foolish Bottom Line
A far more thorough review of CNQ has been provided to members of our flagship Stock Advisor Canada service, where we’ve made the company an official recommendation for these and a number of other reasons. And while we’ve peeled back the curtain here a touch, you’re only a few clicks away from the complete rundown.
If it’s energy exposure you crave, Stock Advisor Canada is here to help as CNQ is but one of a number of recommendations we’ve made. None of which are Suncor.
