The fluctuating prices of oil and natural gas are the key driver of the cyclicality associated with the energy sector. Generally, in a bull run, oil prices remain elevated and nosedive when the economy is in turmoil.
While the macro environment remains sluggish, geopolitical tensions have acted as tailwinds for oil prices in the last 18 months, allowing several energy companies to report record profits in 2022.
So, if you invest in energy stocks, you need to be focused on the impact that price volatility has on oil and natural gas companies. Here are two TSX energy stocks you should buy if oil prices are rising.
Is Suncor Energy stock a good buy right now?
One of the largest Canadian companies, Suncor Energy (TSX: SU), is valued at almost $60 billion by market cap. With assets and investments in the Canadian East Coast and other international markets, Suncor Energy produces oil from the oil sands. It has four refineries in North America that process oil sands crude into refined products.
Suncor’s physically integrated and long-life asset portfolio provides the company with a competitive advantage, allowing it to offer shareholders an annual dividend of $2.08 per share, translating to a yield of over 4.6%.
Due to lower oil prices, Suncor Energy’s net income in Q2 fell by 53% year over year to $1.9 billion. It ended the quarter with free cash flow of almost $1 billion, indicating a payout ratio of less than 70%. This cash stream provides the energy giant with the flexibility to reinvest in growth, lower balance sheet debt, or raise its dividends further.
Suncor recently announced its intention to acquire the Canadian operations of TotalEnergies for US$1.5 billion. TotalEnergies EP Canada holds a 31.2% working interest in the Fort Hills oil sands mining project. The acquisition should add 61,000 barrels per day of net bitumen production capacity and 675 million barrels of proved and probable reserves to Suncor’s existing oil sands portfolio.
Priced at nine times forward earnings, Suncor stock is quite cheap and trades at a discount of 18% to consensus price target estimates.
What is the target price for Vermilion Energy stock?
Valued at $3.3 billion by market cap, Vermilion Energy (TSX: VET) acquires, explores, develops, and produces petroleum and natural gas in North America, Europe, and Australia. In Q2 2023, it reported free cash flow of $80 million or $0.49 per share and paid shareholders a dividend of $0.10 per share, indicating a payout ratio of less than 20%.
Vermilion Energy also utilized its cash flows to reduce balance sheet debt by $1.3 billion, which should reduce interest expenses in the near term.
Recently, Vermilion Energy emphasized its quarterly production for Q3 was at the upper end of its forecast after restarting production at projects located in Ireland and Australia.
Vermilion Energy has completed inspection and repairs at Australia’s Wandoo project and expects to produce 4,000 barrels of oil per day in Q4 from the country.
Priced at five times 2023 earnings, VET stock trades at a discount of 20% to consensus price target estimates.
