TSX energy stocks have been on a tear in 2024. The S&P/TSX Capped Energy Index is up 22% in the year. Geopolitical tensions, particularly in the Middle East, have pushed crude oil prices up consistently over US$80 per barrel.
Given the changes in the Canadian energy patch, many top Canadian energy stocks can generate considerable cash flows at prices like that. This should only get better as new pipelines come online and allow access to better market pricing.
If you are looking for energy stocks that could still have some upside, here are three to buy today.
An energy stock with strong production growth
In Canada, ARC Resources (TSX: ARX) is the third-largest natural gas producer and the largest condensate producer. Over the past few years, it has significantly consolidated its operations and focused on its best-producing assets in the Montney.
Right now, it has a plan to increase its production by a 10% compound annual growth rate (CAGR) for the next five years. It hopes to double its free cash flow generation in that time. Its assets have the potential to produce significantly more afterwards, so there is considerable upside even beyond.
ARC has done a great job diversifying its access to a variety of markets and higher gas prices. Right now, it targets 25% of its production to go to international markets (where prices are significantly better).
Right now, ARC stock yields 2.7%. It has increased its dividend by 120% since 2020. It plans to keep growing its annual dividend by a 10% CAGR. Its solid growth and return prospects have led to a nice valuation re-rating recently. Yet, it still could offer a nice mix of income and capital upside from here.
A diversified energy stock
Another stock set for a re-rating is Cenovus Energy (TSX: CVE). Its production capacity has now surpassed that of Suncor, and today, it is a substantial refiner in North America.
Its refinery business has faced some operational challenges, but its plants are starting to hit their stride with improved efficiency, capacity, and utilization.
With energy and gasoline prices elevated, Cenovus could be set for a very profitable summer. It has its sights set on its $4 billion net debt target by the end of 2024. Once reached, the company is in a sustainable position to return 100% of its excess cash back to shareholders.
Cenovus only yields 2% today. It has increased its dividend by 780% since 2020. Once it hits its debt target, big returns, including variable dividends, dividend increases, and share buybacks, will be coming in shareholders’ direction.
A big dividend stock with growth along the way
Topaz Energy (TSX: TPZ) is the energy stock to buy if you want a low-risk business model with an elevated dividend. Topaz is an energy infrastructure company that also collects an attractive energy royalty stream.
Basically, Topaz invests in contracted infrastructure assets and royalty acreage rights, and it distributes the cash flows back to shareholders.
It operates in prolific regions. Its cash flows are largely based on production rather than commodity prices. However, it does do better when energy prices are higher. It’s a simple, low-risk business model.
The company has significant growth in its current asset base. It has a strong balance sheet so there is opportunity for acquisitions as well. It yields 5.7% and has increased its dividend seven times since it publicly listed in 2019.
