Investing in stocks trading below their intrinsic value can help shareholders beat the broader markets over time. In the last 12 months, lower oil prices have dragged shares of companies in the energy sector significantly lower, allowing you to buy undervalued stocks at a discount.
With this in mind, here are two cheap TSX energy stocks you can consider buying in February 2024.
Whitecap Resources stock
Whitecap Resources (TSX:WCP) is an oil and gas company involved in the acquisition, development, and production of oil and gas assets, primarily in Western Canada. Valued at $5.2 billion by market cap, Whitecap Resources is down 54% below all-time highs, allowing you to buy the dip.
Despite the pullback, Whitecap stock has returned close to 250% since its initial public offering in July 2010 after adjusting for dividends. Comparatively, the TSX index has gained 176% in this period.
The drawdown in Whitecap stock has increased its dividend yield to more than 7%, making it attractive to income-seeking investors. In the third quarter (Q3) of 2023, Whitecap reported funds flow of $466 million, or $0.76 per share, indicating a sequential gain of 12% on a per-share basis. After accounting for capital expenditures, its funds flow totalled $184 million in Q3.
Given it pays shareholders a monthly dividend of $0.0525 per share, Whitecap ended Q3 with a payout ratio of just 50%, providing it with enough room to raise dividends, lower its balance sheet, and reinvest in growth projects.
Whitecap Resources also ended Q3 with net debt of $1.3 billion and now aims to return 75% of free funds flow to shareholders, increasing its annual payout to $0.73 per share in 2024, up from $0.63 per share in 2023.
Whitecap Resources acquired XTO Energy Canada for $1.9 billion in 2022 and has since reduced its net debt by more than $900 million while returning $447 million to shareholders via dividends and buybacks.
Priced at 6.5 times forward earnings, Whitecap Resources stock trades at a discount of 56% to consensus price target estimates.
Canadian Natural Resources stock
A TSX giant, Canadian Natural Resources (TSX:CNQ) has crushed broader market returns in the last 20 years. Since January 2004, CNQ stock has returned 1,500% to shareholders after accounting for dividends. Despite its outsized gains, the TSX energy heavyweight currently offers shareholders a forward yield of 4.75%.
In Q3, CNQ reduced its operating costs by 27% to $11.47 per barrel due to higher production and lower natural gas fuel costs. It reported an adjusted funds flow of $4.7 billion in Q3 due to its diversified portfolio of long-life, low-decline assets. In the first 10 months of 2023, CNQ returned over $6 billion to shareholders through buybacks and dividends.
CNQ recently raised its quarterly dividend to $1 per share, indicating an increase of 18% year over year. Canadian Natural Resources has raised dividends for 24 consecutive years at an annual rate of 21%, which is exceptional for an oil and gas company.
Canadian Natural Resources ended the quarter with a debt to earnings before interest, tax, depreciation, and amortization) of 0.7 times, which is acceptable given the company’s strong cash flows.
Priced at 11.8 times forward earnings, CNQ stock is very cheap and trades at a discount of 15% to consensus price target estimates.
