TSX Energy Sector: Best Stocks to Buy in May 2024

Energy stocks like Suncor are generating massive amounts of cash flows and paying out significant dividends.

Karen Thomas, MSc, CFA

Karen is a stock market enthusiast focused on uncovering those stocks that she believes the market has mispriced. She does this through fundamental and quantitative analysis of companies and their industries, as well as a study of future opportunities and trends. She holds a Masters degree in Finance, the CFA designation, and has over 20 years of experience in the investment management industry. Having worked at a major pension fund, as well as two leading mutual fund firms as an analyst and portfolio manager, she has solid investing expertise which she aims to share with her readers.

Published May 22, 2024 8:45 pm EDT

Energy stocks have continued to perform well this year as oil prices have remained well above $70. This has translated into soaring profits and cash flows for the TSX energy sector. In this article, I’ll highlight what I believe to be the three best energy stocks to buy now.

Canadian Natural Resources

Canadian Natural Resources Ltd. (TSX: CNQ) is a top-tier Canadian oil and gas company, with annual revenue of $36 billion and a market capitalization of $113 billion. 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. This ensures reliable and predictable cash flow generation from CNQ.

Speaking of cash flows, Canadian Natural reported $2.9 billion in operating cash flow in its latest quarter (Q1 2024). Adjusted earnings per share (EPS) came in at $1.37 compared to $1.69 in the same period last year, for a 19% decline. Also, EPS came in below expectations of $1.47.

The results were largely driven by a sharp decline in realized prices. For example, the company’s synthetic crude oil realized price fell 7.5% to $88.84, and its realized price for natural gas fell 40% to $2.55.

However, taking a step back and looking at the bigger picture, I remain positive on Tourmaline. With the company’s decision to return 100% of its free cash flow to shareholders starting this year, there is a lot of cash coming our way. Year to date, the company has returned $3.1 billion to shareholders, and this year is the 24^th consecutive year of dividend increases. During this time, CNQ’s dividend has grown at an impressive compound annual growth rate (CAGR) of 21%.

Suncor: An undervalued energy stock

With a new CEO, who has already triggered real and quantifiable improvements, Suncor Inc. (TSX: SU) is looking good once again. In fact, Suncor’s stock price has increased 42% in the last year, as the company has been consistently beating expectations.

Yet, Suncor stock is still under the cloud of its past mistakes, and therefore, remains undervalued. But that’s all right because the company’s momentum continues to build. It, therefore, seems like just a matter of time until the company and the stock get into investors’ good graces again – and SU commands a premium multiple again.

Because make no mistake, Suncor’s business does deserve a premium multiple. The level of integration of its assets and operations provides Suncor with optionality and flexibility to chase and secure the highest netbacks.

The company’s physical integration consists of three mines, and in situ operations, which are connected to two large upgraders. This provides Suncor with this flexibility and optionality proving to be invaluable. Basically, Suncor can move its resources accordingly to maximize value. The company has been capitalizing on this better than ever.

Tourmaline: The best natural gas stock

My last TSX energy stock that I’d like to highlight is Tourmaline Oil Corp. (TSX: TOU). This energy firm is different from the other two stocks I’ve discussed in this article because it’s pretty much a natural gas producer.

Despite natural gas prices that have all but collapsed in North America, I consider Tourmaline to be an energy stock to buy. The reasons for this are quite straightforward. Firstly, Tourmaline is Canada’s largest natural gas producer with strong operational and financial performance. Secondly, Tourmaline has growing exposure to the liquified natural gas, or LNG, market. This market gives the company access to higher natural gas prices and strong demand forces.

Finally, Tourmaline has been generating significant cash flows as a result and rapidly growing dividends. In the last five years, Tourmaline’s regular dividend has grown 150% to the current $1.20 per share. That’s quite amazing, but there’s more.

On top of this, Tourmaline has also been paying special dividends from time to time – in the last five years, the company has paid a total of $10.25 per share in special dividends.