Better Energy Stock: SU or CNQ?

Suncor stock is grossly undervalued, as the company makes headway to recover from operational and safety challenges that have plagued it.

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The oil and gas industry is notoriously volatile. Yet, there are ways to work around this and secure strong returns from the sector. Two of the top energy stocks today are Suncor Energy Inc. (TSX:SU) and Canadian Natural Resources Ltd. (TSX:CNQ). But which stock is the better buy – Suncor (SU) or Canadian Natural (CNQ)?

Let’s explore.

Canadian Natural Resources (CNQ) stock

Canadian Natural Resources is an $88 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.

Over the years, Canadian Natural Resources has proven itself to be an excellent operator that exercises sound financial practices. This has made the company, and the stock, quite resilient. In the oil and gas industry, where volatility is the rule, Canadian Natural stands out.

The company’s latest quarter, Q3 2023, demonstrated all of these characteristics once again. Free cash flow came in at approximately $2.7 billion, after dividend payments and capital expenditures. This cash continues to be used to pay down debt, and the company expects its debt to fall to its $10 billion target in Q1 2024. At that time, 100% of free cash flow will be allocated to shareholder returns.

Currently, CNQ stock trades at reasonable valuations. In fact, it trades at 11 times this year’s expected earnings and 10.9 times next year’s expected earnings, and a price to cash flow of 6 times.

Suncor (SU) stock

Another Canadian energy stock that has a strong history of outperformance is Suncor Energy. While the last few years have not been the company’s best years, the underlying business remains well positioned. This is because Suncor is an integrated oil and gas company, one that has both upstream and downstream operations.

What this does is offer Suncor diversification that gives it a more stable and steady profile over time. As you can see from Suncor’s stock price graph below, the stock has increased significantly in the last 20 years. This almost 200% increase was enhanced by annual dividend payments.

Today, Suncor stock is cheap as it attempts to recover from recent safety and operational issues. Trading at a mere 3.9 cash flow and 8 times this year’s expected earnings, there is clear value if Suncor can make the necessary improvements. And the new CEO is tasked with the job of making this happen.

Suncor’s third quarter EPS result came in strong – almost 12% better than expected. Also, adjusted funds from operations came in at $3.6 billion, and operational improvements were boosting efficiencies. Suncor is focusing on improving its breakeven and lowering its cost structure. Currently, the company’s breakeven is $50 oil. Oil prices are approximately $75 today.

The bottom line

Both Suncor and CNQ are good energy stocks to own. But today I favour Suncor because in my view, expectations on the company, and therefore, valuation, are quite low. This means that there are many ways that the company can outperform and drive its stock price higher.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Karen Thomas has no position in any of the stocks mentioned. The Motley Fool recommends Canadian Natural Resources. The Motley Fool has a disclosure policy.

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