The energy sector is a great place for investors seeking gushing cash flows and relative value. Undoubtedly, the sector isn’t so exciting these days, especially given the enthusiasm surrounding various green energy initiatives. Though wind, solar, gas, and even nuclear energy may be the future, with numerous projects poised to go online in the coming decade, I’d argue that it’s way too early to give up on some of the oil giants.
Indeed, the transition to a greener future could take many years and decades. And with rising energy demands, perhaps fossil fuels aren’t quite on their way out yet, especially with international nations, some of which may not yet have a concrete plan to make the jump from dirty to green energy.
The U.S. election could move the energy stocks
Further, the Biden-Trump election in the U.S. could have a major impact on oil prices. Undoubtedly, a Trump victory could be a boon for oil and a slight setback for renewables. With President Biden having posted a pretty poor showing during the late-June debate, it seems like the odds of a Trump win have increased considerably.
Indeed, it’s tough to tell who will win the election, especially if Joe Biden gives another Democrat a shot to go toe-to-toe against Donald Trump. Either way, I’m sure green energy stocks will be cheering for Biden, while oil plays will be hoping for a Trump victory.
U.S. elections aside, I view the energy stocks as pretty undervalued right here, especially if investors decide they want real earnings and rich cash flows over just ambitious artificial intelligence (AI) growth narratives. In the meantime, investors shouldn’t view the top-performing energy plays as value traps, even though the multiples assigned to them may seem just a tad too good to be true.
In this piece, we’ll look at two Canadian energy stocks that I view as better bets than the broader TSX Index for the next 18 months, and that’s regardless of who comes out on top in the coming U.S. presidential election.
TC Energy
The midstream energy companies are quite the cash cow, yet shares are incredibly cheap. TC Energy (TSX:TRP) is a great pipeline pick with a generous 7.36% dividend yield. Undoubtedly, investors recently voted in favour of a spin-off of TC Energy’s crude pipeline business.
Once the move happens, TC Energy will be more of a natural gas play. Additionally, such a spin-off could unlock hidden value across the firm’s businesses. In any case, I view TRP stock as a great buy ahead of the spin-off, while it’s going for just 19.9 times trailing price-to-earnings (P/E) ratio. Sure, big change is ahead, but I think it’s for the better as the firm looks to overcome a historic slump.
Cenovus Energy
Cenovus Energy (TSX:CVE) is a better stock to pick if you’re looking for oil prices to stay stronger for longer. Indeed, midstream firms like TC Energy aren’t as sensitive to fluctuations in oil prices. That may make TC more utility-like, especially once the spin-off is completed.
In any case, Cenovus stands out as a cheaper energy firm and one that could have more upside. The stock trades at 11.4 times trailing P/E, with a 2.68% dividend yield. The energy producer is also fresh off a first-quarter earnings beat, thanks in part to higher production. After such a strong showing, I’d not be afraid to punch my ticket to the name, especially if you’re light on crude exposure.
