Canadian energy stocks have been on a roller-coaster ride in 2023 (as per usual, it seems). Over the summer and autumn, these stocks had a strong run-up. However, the momentum seems to be waning as oil prices have recently pulled back from US$93 per barrel to around US$77 per barrel today.
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A standard dip for Canadian energy stocks could be a buying opportunity
Frankly, this is just a standard seasonal dip. Canadian energy stocks continue to be a very strong place to look for dividends. Why? Since the pandemic, global energy demand has had a strong recovery. Yet energy supply has not increased to meet that demand.
In the past few years, Canadian energy stocks have dramatically improved their balance sheets. No longer focusing on aggressive production growth, many companies are looking to deliver their excess cash back to shareholders. As a result, this sector is becoming an attractive place for reasonably safe dividends.
Three Canadian energy stocks that look attractive for dividends today are Pembina Pipeline (TSX: PPL), Whitecap Resources (TSX: WCP), and Cenovus Energy (TSX: CVE).
A top Canadian infrastructure stock
Pembina Pipeline is a great way to get energy exposure but with significantly lower commodity risk. Pembina operates a mixed portfolio of important energy assets in Western Canada. Egress and collection pipelines, natural gas processing, storage, and export terminals are all contracted assets in its portfolio.
Over 85% of its earnings come from contracted assets. This widely supports and backstops its attractive 6% dividend yield.
Despite its large yield, the company expects to maintain its capital growth program and yield excess free cash in 2023. Pembina has one of the best balance sheets among Canadian pipeline stocks.
It is in a strong position to invest in larger capital growth options (pipelines, liquified natural gas terminals, etc.), but management has been patient (which is a good thing). Given its strong cash profile, further dividend growth is likely going into the future.
A mid-cap Canadian energy stock with a big dividend
If you want an elevated dividend yield with greater exposure to oil and natural gas, Whitecap Resources might be the Canadian energy stock to hold. Today, this company yields 7%. The good news is that its dividend is tested all the way to oil priced at US$50 per barrel.
Whitecap has a strong balance sheet with debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) sitting at 0.5 times. The company has very good assets with 30 years of energy inventory.
It plans to grow production by about 5% a year. It can do so at very little incremental cost. If energy prices remain elevated, the company is likely to continue churning out significant dividends to shareholders.
A major energy company with a growing dividend
Unlike the two stocks above, Cenovus Energy does not have a large dividend yield. It only yields 2.2% today. However, with operations drastically improving, this Canadian energy stock is getting closer to delivering significant cash returns to shareholders.
In its most recent quarter, the company generated $2.4 billion of free cash. It used that to pay down $1 billion of debt and buyback $361 million of stock. With net debt of $6 billion, Cenovus is close to its debt target of $4 billion. When it hits that goal, it plans to return 100% of excess cash back to shareholders.
Last year, it increased its quarterly dividend by 200% (and it paid a special dividend). This year, it increased its dividend by 33%. As the company nears its targets, chances are good its dividend will continue to rise at an attractive pace.
