Suncor Energy (TSX:SU) and Canadian Natural Resources (TSX:CNQ) are giants in the Canadian energy sector and have gone through some wild volatility in the past three years. Investors who missed the big rallies off the 2020 market crash are wondering if the recent dip in TSX energy stocks is a good opportunity to buy SU shares or CNQ stock for their portfolios.
Suncor used to be considered the go-to energy stock in the TSX for investors who wanted reliable dividends and a relatively stable share price. The company’s integrated business structure with its oil production, refining, and retail operations historically helped the stock hold up well when oil prices hit a slump. That wasn’t the case, however, when the pandemic drove down oil prices and hammered fuel demand. All three of Suncor’s divisions took a hit and management made a surprise decision to cut the dividend by 55%.
This sent Suncor’s stock into a deeper decline than it might otherwise have endured and while the share price has rebounded off the 2020 lows, Suncor has not enjoyed the same recovery as its peers. Suncor trades near $39 per share at the time of writing. That’s about where it was before the pandemic crash.
Contrarian investors might want to start adding Suncor to their holdings. The board has increased the dividend significantly to recover the cut and even push the payout to a new high. At the time of writing, investors can get a 5.3% dividend yield.
Suncor has a new chief executive officer (CEO) with extensive experience in the Canadian energy sector and he is focused on driving improved investor returns. It might take some time to turn Suncor around, but you get paid well to wait, and the upside could be significant.
Canadian Natural Resources
CNRL has replaced Suncor as the top dog in the Canadian energy sector. The company has a market capitalization of close to $84 billion compared to $51 billion for Suncor. CNRL operates extensive oil and natural gas production assets that span the hydrocarbon spectrum. Oil, sands, conventional heavy oil, conventional light oil, offshore oil, natural gas liquids, and natural gas are all part of the mix.
CNRL is good at allocating capital quickly and efficiently to take advantage of changes in commodity prices. The strong balance sheet enables management to make strategic acquisitions at discounted prices when the sector goes through a downturn.
At the time of writing, CNRL trades for close to $76 per share. That’s down from the 12-month high near $88 but is roughly double where CNQ stock traded in early February 2020.
The board raised the dividend in each of the past 23 years and investors have enjoyed compound annual dividend growth of better than 20% over that timeframe. At the current share price, the stock provides a 4.75% dividend yield.
Is one a better pick right now?
Oil bulls should view both stocks as attractive at their current prices, especially if oil is headed back to more than US$100 per barrel in the next 12-18 months. If you think Suncor’s new CEO can deliver a turnaround in the company, Suncor might be the more attractive pick for investors. Otherwise, CNRL should be a solid bet for passive income and total returns.
I would probably split a new investment between the two stocks. This should reduce overall risk while still providing a 5% yield and a shot at better potential upside torque in case Suncor rockets higher in the next few years.