Despite the announcement of production cuts by Saudi Arabia, oil prices have declined by over 17% from their April highs. The concerns over the impact of prolonged high-interest rates on global growth appear to have dragged oil prices down. Amid the weakness in the energy sector, Suncor Energy (TSX: SU) and Canadian Natural Resources (TSX: CNQ) have been under pressure over the last few months.
Now, let’s look at the outlook of oil and assess which among Suncor Energy and Canadian Natural Resources could be a better buy.
Oil price outlook
International Energy Agency projects oil demand to rise by 2.4 million barrels per day in 2023 to 102.3 million barrels per day, which would be a record. The rebound in Chinese demand could drive oil demand. Additionally, OPEC (Organization of the Petroleum Exporting Countries) projects oil demand to reach 110 million barrels per day by 2045.
Meanwhile, OPEC and its allies’ announcement of production cuts and rising demand could drive oil prices in the coming quarters. Meanwhile, analysts look bullish on oil, with Goldman Sachs projecting Brent crude to reach US$86 per barrel by December, representing a 16.5% increase from its current levels. Rising oil prices could benefit oil-producing companies. Given the favourable environment, let’s look at both companies’ recent performances and growth initiatives.
Suncor Energy
In the March-ending quarter, Suncor Energy reported adjusted operating earnings of $1.809 billion, representing a 34% decline from its previous year’s quarter. Lower crude oil realizations, a decline in upstream production and refinery throughput, and higher operating expenses dragged its earnings down. Meanwhile, its adjusted funds from operations also fell 27% to $3 billion.
However, the company focuses on portfolio optimization by acquiring a 14.65% working interest in Fort Hills and selling wind and solar assets and the U.K. E&P (exploration and production) portfolio. It has utilized its excess cash flows in the last two years to lower its debt and buy back shares, which could boost its financials in the coming quarters. Additionally, it also rewards its shareholders with a quarterly dividend of $0.52/share, translating its forward yield to 5.41%.
Canadian Natural Resources
Canadian Natural Resources also witnessed a sharp decline in its financials amid lower price realization. Its adjusted operating earnings fell 44% to $1.88 billion while generating adjusted fund flows of $3.43 billion compared to $4.98 billion in the previous year’s quarter. However, year to date, the company has returned around $2.8 billion to its shareholders through share repurchases and dividends as of May 4.
Notably, the company expects to make a capital investment of around $5.2 billion this year, reinforcing its production growth of 70,000 barrels of oil equivalent per day. Given its long-life, low-decline assets, the company would break even at West Texas Intermediate crude trading in mid-US$30 per barrel. So, with oil trading substantially higher and projected to rise further, I am bullish on CNQ.
CNQ has raised its dividends at a CAGR (compound annual growth rate) of 21% for the previous 23 years. Its forward yield stands at a healthy 4.94%.
Investor takeaway
Amid the decline in oil prices, both companies have been under pressure over the last few weeks. Suncor Energy has lost 23.5% of its stock value compared to its 52-week high, while CNQ is down by 13.5%. The selloff has dragged their valuations down, with Suncor Energy and CNQ trading at next 12-month price-to-earnings multiples of eight and 10, respectively.
Although the recent corrections and attractive valuation offer excellent buying opportunities in both stocks, I am more bullish on CNQ due to its stable returns, diversified asset portfolio, and consistent dividend growth.
