Suncor (TSX:SU) and Canadian Natural Resources (TSX:CNQ) are moving higher on a rebound in oil prices. Investors who missed the rally over the past two months are wondering if SU stock or CNQ stock is still cheap and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) focused on dividends and total returns.
Oil market outlook
Oil investors sat on the sidelines for most of the first half of 2023 as rising recession fears made traders hesitant to make big bets on higher oil prices. The U.S. Federal Reserve and other central banks are raising interest rates in an effort to slow down the economy as a tool to tame inflation. Traders worried that the steep rise in rates over such a short period of time would lead to a deep economic contraction.
So far, that hasn’t occurred. The current consensus among economists, in fact, appears to be a soft landing for the economy, both in the United States and across the globe. In that scenario, oil demand will likely remain strong, as people continue to book flights and companies mandate a return to the office for a few days per week. This is partly why oil has rallied.
Traders might also be building oil positions ahead of a potential surge in demand in China. The Chinese economy hasn’t recovered yet from the effects of the pandemic lockdowns and the struggling property sector. Stimulus measures from the government could drive a jump in fuel consumption next year.
On the supply side, Saudi Arabia recently announced it will extend supply cuts in an effort to prop up oil prices. Across the global industry, many producers are focused more on returning cash to shareholders than investing in large new production projects. Some pundits say a supply squeeze could be on the way.
Ongoing volatility should be expected. For the moment, however, the trend appears to be higher for oil prices.
Suncor
Suncor trades for close to $46.50 per share. That’s up from $38 in July but still below the $53 the stock reached in June 2022 when West Texas Intermediate oil topped US$120 per barrel.
Suncor has underperformed the other major oil sands producers over the past three years. Safety and operational issues along with the poor performance of the stock price led to pressure from an activist investor to make changes to get the business back on track.
Suncor put a new chief executive officer in charge earlier this year. The company has trimmed staff to reduce expenses and is refocusing on the core production, refining, and retail divisions that historically made Suncor a top pick in the energy patch due to the integrated structure that normally provides a revenue hedge against declining oil prices.
Suncor’s dividend provides a 4.5% yield at the time of writing. The board cut the distribution in 2020 to preserve cash during the pandemic but has since raised the payout to a new all-time high.
Canadian Natural Resources Limited
CNRL has replaced Suncor as the largest energy producer on the TSX and currently has a market capitalization of nearly $94 billion. Suncor’s market cap is about $60 billion.
CNQ stock trades around $87 right now. This is just below the all-time high of about $90 the stock hit in recent days and is more than double the price the shares fetched before the pandemic. Suncor traded around $40 in early 2020.
CNRL has a broad range of oil production assets and is a major natural gas producer. The diversified assets and CNRL’s 100% ownership of most of its operations provide flexibility to benefit from positive shifts in commodity prices. Management is good at allocating capital around the portfolio to maximize returns.
CNRL raised its dividend in each of the past 23 years with a compound annual dividend-growth rate of better than 20% over that timeframe. The distribution currently provides a 4.1% yield.
Is one a better pick?
Suncor is the contrarian bet right now. If the new management team can turn things around, the stock could deliver attractive gains in the next few years as it catches up with its peers. Suncor’s integrated structure should also start to find favour again among investors.
CNRL is likely the safer pick, and you get the benefit of the natural gas production, which diversifies the revenue stream.
If you are an oil bull and think prices are headed even higher, I would probably split a new investment between the two stocks today.
