Oil prices soared in the past few days on fears that escalation in the conflict between Iran and Israel could lead to major supply disruptions. Investors who missed the bounce in TSX oil stocks are wondering which oil producers might still be undervalued and good to buy if oil prices are headed higher.
Canadian Natural Resources
Canadian Natural Resources (TSX:CNQ) is a giant in the Canadian energy sector with a current market capitalization of nearly $100 billion. The stock trades near $47.50 compared to $56.50 about six months ago. It is up from $43.50 in recent weeks.
CNQ is a good stock to buy if you want exposure to both oil and natural gas and you like getting paid a solid dividend. The company has a great track record of dividend growth, even during challenging times in the energy market. Investors who buy CNQ stock at the current level can get a dividend yield of 4.4%.
Baytex Energy
Baytex Energy (TSX:BTE) is a riskier play. The share price tends to be quite volatile, making big moves on positive or negative news in the energy market. At the time of writing, Baytex trades near $4.40 per share. It was below $4 a few days ago and traded as high as $6.30 in the past year.
The long-term chart on Baytex is a bit scary. The stock was around $40 10 years ago but took an extended beating after an expensive acquisition in 2014 at peak oil prices saddled the company with heavy debt right before oil prices subsequently tanked. Baytex eliminated its generous dividend, and the stock eventually bottomed out at around $0.30 in 2020.
New management has done a good job of getting the balance sheet repaired, and Baytex now pays a dividend again with a current yield of around 2%. If you are an oil bull and can handle volatility, BTE stock might be worth a shot around this price. Otherwise, it would be best to stick with CNQ.
The bottom line on Canadian oil stocks
In a worst-case scenario where Iran blocks the Strait of Hormuz or has its oil infrastructure wiped out, the market could see oil surge as high as US$200 per barrel, according to some analysts. In that scenario, Canadian oil stocks would likely soar, at least briefly.
On the other side of the trade, the reasons for weakness in the price of oil over the past six months remain in place. Global supply is healthy, while demand appears to be weakening, led by economic challenges in China and overall slowing economic activity as hikes to interest rates that occurred over the past two years continue to work their way through the system. If tensions cool off in the Middle East, West Texas Intermediate oil could quickly slip back below US$70.
Investors need to decide which side of the trade they want to bet on. Either way, I would keep the exposure small.
