Like it or not, oil prices remain persistently high. As a function of supply and demand, higher oil prices are increasing our cost of living and creating inflationary pressure for businesses. But there’s a way to benefit from this: invest in oil stocks.
Here are three oil stocks to buy to share in the profits.
Canadian Natural Resources
Canadian Natural Resources (TSX: CNQ) is a $94 billion Canadian oil and gas company. Its assets consist of a diversified portfolio of high-quality natural gas, crude oil, and upgrading assets. Importantly, these assets are long-life assets, and, as such, the company’s reserves are expected to last 32 years.
This oil stock has generated consistent shareholder value over the years. In fact, its stock price has a 10- year return of 175%. Also, in the last 20 years, its dividend has grown at a compound annual growth rate of 25%.
But what makes Canadian Natural stock a good stock to invest in today? Well, firstly, it trades at depressed multiples of 12 times earnings, six times cash flow, and 2.4 times book value. These multiples are very attractive when we consider CNQ’s returns and the fact that oil prices remain around $90. CNQ’s strong cash flow generation and return on equity (ROE) of almost 20% make premium multiples more than justified.
Pason Systems
Pason Systems (TSX: PSI) provides equipment and services that oil and gas production companies require. In Pason’s case, the equipment that it supplies is digitized platforms that give operators an unprecedented view into their oilfields. The company is a technological leader in the oil patch and has been digitizing the oil patch for decades.
In October 2023, Pason stock is a top oil stock to invest in. This is my view for a variety of reasons. For example, Pason’s offering is unique, and the company has a leading market share in its industry. Also, Pason is another oil stock that trades at depressed multiples, especially when we consider the quality of its business. The company has little debt, strong cash flows, and a high ROE of over 30%.
Yet investors don’t seem to know this company very well. I think this has caused it to fall beneath their radar. It’s also caused the stock to be highly undervalued. In its latest quarter, Q2 2023, Pason saw its revenue increase 15% and its earnings per share (EPS) increase 40%. This was driven by the company’s strong competitive positioning. Although overall activity levels were down versus last year, Pason was able to increase its revenue per day, further solidifying its leadership position.
Looking ahead, Pason will likely continue to benefit from strong activity in the oil and gas industry as well as the push toward digitization.
Suncor Energy: One of the most highly undervalued oil stocks
Suncor Energy (TSX: SU) is an integrated oil and gas company that has upstream and downstream operations. This means oil sands production as well as refining or upgrading assets. In theory, what this does is that it offers Suncor a diversification that gives it a more stable and steady profile over time.
In October 2023, Suncor’s stock price remains highly undervalued. Many issues have plagued the company, such as safety issues and sub-optimal operations. Looking ahead, a new chief executive officer is in place to drive improvements and bring the company back to its glory days.
In its latest quarter, Suncor reported $2.7 billion in funds from operations. While the company is tracking at the low end of its guidance for this year, the stock remains very cheap when you take a long-term view.
Suncor is focusing on improving its breakeven levels and lowering its cost structure. Currently, the company’s breakeven level is $50 oil. Oil prices are approximately $90 today. Suncor continues to have a strong balance sheet and a unique integrated business that should fare well in many operating environments. Suncor’s stock price is trading at very depressed valuations of 10 times earnings, four times cash flow, and 1.5 times book value, despite generating high returns and margins. Lastly, its dividend yield of 4.6% is a bonus for investors.
