Energy stocks are not typically associated with safe and steady passive income. Oil and natural gas prices are volatile. As a result, the earnings and cash flows of energy stocks can fluctuate.
While this is a sector-wide concern, Canadian energy stocks have recently done a good job de-risking their business models.
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Canadian energy stocks are primed to deliver great dividends
Firstly, when oil prices hit negative levels, companies had no choice but to lower costs, lean out operations, and seek efficiencies. Many companies have significantly reduced their cost base and increased their netbacks. Many energy stocks can support their dividend even if oil prices dip below US$45 per barrel.
Secondly, many top energy stocks have focused on improving their balance sheet. With production and drilling no longer a key focus, these companies have reduced their dependence on debt. Many top Canadian energy stocks have less than one times net debt to cash flows.
Finally, with companies hitting long-term debt targets, excess cash is being returned to shareholders in the form of dividend increases, special dividends, and substantial share buybacks. If you are looking for passive income that could continue to grow for years ahead, here are two high-quality stocks.
The king of Canadian energy
Canadian Natural Resources (TSX: CNQ) is the cream of the crop for TSX energy stocks. With 1.3 million barrels of oil equivalent (BOE/d), it is the largest oil producer in Canada.
The company has exceptional assets. It has 33 years of proved reserves and several decades more of probable reserves. In fact, it could easily double production if it had enough egress to transport its energy.
CNQ is very well set up to deliver solid returns for shareholders in the years ahead. It just hit its $10 billion net debt target. Debt to adjusted funds flow sits around 0.7. This is very reasonable, given the predictability and consistency of its assets.
Last year, CNQ returned $6.60 per share in dividends and share repurchases to shareholders. With very manageable debt, the company has decided to return all its excess cash back to shareholders. That means shareholder cash returns are likely to be even larger in 2024.
The company has a record of growing its dividend by a 21% compounded annual growth rate for 24 consecutive years. Right now, this high-end energy stock yields 3.9%.
A TSX energy stock gushing special dividends
Tourmaline Oil (TSX: TOU) is another TSX energy stock to hold for the long-term. Tourmaline is the largest natural gas producer in Canada. Natural gas is a more volatile commodity, so it helps that Tourmaline is also a substantial liquids and condensate producer.
Like CNQ, Tourmaline has decades of reserves that it can unlock at only incremental expense. Tourmaline owns most of its infrastructure, which provides it with a strong cost advantage. It also has access to a diverse mix of markets, so it can fetch significantly better prices than in Canada. As a result, this company tends to generate a lot of spare cash.
When subtracting its stake in Topaz Energy, Tourmaline only has a net debt-to-cash flow ratio of 0.2. That is very conservative. Given its strong balance sheet, Tourmaline has been returning most of its excess cash to shareholders. In fact, since 2021, it has paid $14.25 in special dividends.
This energy stock only yields 2% today, but it has doubled its base dividend since 2021. For a well-managed business that is gushing special dividends, Tourmaline is a solid long-term holding.
