Like oil prices, oil stocks have been pretty volatile in the last year. This volatility has always existed in the cyclical oil and gas market, but that doesn’t seem to make it any easier. In this article, I focus on the long-term picture in order to uncover two oil stocks to invest in today.
Macro-economic weakness, coupled with surging oil production, have sent prices spiralling downward in the last couple of months. In September, oil was trading over $90, and today, it’s just over $70, for a more than 20% drop. Of course, oil stocks have behaved similarly, posting steep declines over this time period.
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Suncor Energy
As Canada’s largest integrated oil and gas company, Suncor Energy Inc. (TSX:SU) has a lot of advantages. From the cost savings and efficiencies that it derives from supplying its own upgraders, to its diversified revenue profile, they spell greater predictability and stability.
Suncor stock has fallen 13% from its September levels, in response to the drop in the price of oil. As far as the company goes, however, things have been looking up. In its latest quarter, Suncor reported adjusted funds from operations of $3.6 billion and operating earnings of $2 billion. The company’s upgraders were operating at over 100% utilization, and operational and safety improvements were well underway.
Yet, despite all of this, Suncor stock remains grossly undervalued. It trades at 3.7 times cash flow and 6.6 times earnings, well below its peer group. And this valuation is accompanied by high returns, making it all the more attractive. In fact, Suncor’s return on equity (ROE) is an impressive 20%.
Canadian Natural Resources
Another oil stock worth buying in December is Canadian Natural Resources Ltd. (TSX:CNQ). Canadian Natural is one of Canada’s premier oil and gas companies. Its history of stability, strong returns, and shareholder value creation speaks volumes as to the quality we get when we invest in CNQ stock.
In the last couple of months, CNQ stock has declined 8%. But, it’s doing exceptionally well on a five-year basis, up 165%. Today, oil is trading at $70. To get a sense of just how profitable Canadian Natural Resources is, let’s look at the company’s break-even WTI price. This is the oil price at which it can cover its capital expenditures as well as its dividend. Today, the company’s break-even is below $40.
So, with oil at $70, Canadian Natural is very well positioned. The company’s business model supports steady and consistent long-term performance. It’s driven by its asset base, which is a long-life asset base with low decline rates. This means that production declines at a slow rate, improving the assets’ returns and risk profile.
Unlike Suncor stock, CNQ stock is not grossly undervalued. Trading at 6.3 times cash flow and 13 times earnings, Canadian Natural is not cheap, but you’re paying for quality and reliability.
Over the long-term, Canadian Natural is a good choice for oil exposure for these reasons. This year represents the twenty-fourth consecutive year of dividend increases at CNQ, with a compound annual growth rate (CAGR) of 21% over that time period.
The bottom line
Oil stocks have fallen over the last couple of months as the supply/demand fundamentals have shifted. On a longer-term basis, however, energy (oil) demand should remain strong. Investing in the two oil stocks discussed in this article are good ways to gain exposure.
