Energy stocks continue to benefit from high oil prices. In contrast, natural gas prices remain low and are hitting natural gas energy stocks. But the long-term outlook remains bullish.
The two energy stocks that I’ll discuss in this article are not only undervalued, but they also pay a dividend. They are leaders in their respective businesses and have a history of solid operational and financial performance.
Without further ado, here are the two energy stocks to buy right now.
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Cenovus Energy
Trading at $23.75 at the time of writing, Cenovus Energy Inc. (TSX: CVE) remains a leading Canadian integrated energy company. With high quality and low-cost oil sands and heavy oil assets, as well as midstream and downstream infrastructure, Cenovus is well-positioned in this $77 oil price environment.
But let’s take a look at Cenovus’ latest results to get a sense of just how lucrative this business is. For the year 2023, Cenovus reported revenue of $52 billion, with $7.4 billion of operating cash flow and $3.1 billion in free cash flow.
These results were lower than 2022 results, as oil prices were lower, but they are extremely strong nonetheless. For example, the company’s free cash flow margin was 6%. This means that 6% of the company’s revenue was converted into free cash flow. It’s a measure of profitability and for the capital-intensive oil and gas industry, a 6% margin is quite good.
This strong financial performance has led to a strong history of dividend payments for Cenovus. In fact, almost triple in the last five years. Cenovus’ current annual dividend is $0.56 per share, for a 2.36% dividend yield.
Peyto Exploration and Development
On the natural gas front, we have Peyto Exploration and Development Corp. (TSX: PEY). Peyto is a key player in the Canadian natural gas market, with production approaching 125,000 barrels of oil equivalent per day (boe/d).
Peyto has top-quality assets, which can be found in one of Canada’s most prolific basins, the Alberta Deep Basin. It’s a basin that’s characterized by a high return production profile, with high recoveries and predictability. This has enabled Peyto to remain one of the lowest cost natural gas producers, with a consistent, growing dividend.
In the first nine months of 2023, times were tough for Peyto, as natural gas prices remained stubbornly low. In turn, this led to big drops in revenue, cash flows, and income. Dividends, however, remained strong. In fact, total dividends per share increased 122% to $1. This was made possible by Peyto’s strong financial management. The company has kept a low debt balance as well as a low dividend payout ratio, which is currently just over 60%.
Today, Peyto is undervalued, trading at a mere 4.3 times cash flow and 1.1 times book value. This is despite the company’s solid operational and financial management, as evidenced in its 15.6% return on equity.
In my view, the long-term outlook for natural gas remains strong, as global demand continues to drive record LNG volumes. As Canadian LNG facilities near completion, we can expect natural gas producers like Peyto to increasingly secure deals to supply them.
The bottom line
While the oil and gas industry will always be a cyclical one, Cenovus and Peyto are well-positioned to manoeuvre through the cycles and drive long-term value. This is why they’re both attractive buys right now.
