Canadian energy stocks have been very volatile in 2024. The TSX Capped Energy Index has had over eight drawdowns of 5% or more this year! With a weakened global economy, energy demand has been stagnant.
Yet, oil production has remained strong. As a result, oil and gas prices have not been anywhere most market commentators or investors had expected.
Source: Getty Images
Commodities are down, but it is time to increase the quality of your Canadian energy stock portfolio?
Investors can take the commodity weakness as a long-term opportunity to add the highest-grade energy stocks to their portfolio. Many of these stocks have excellent records of capital allocation and shareholder returns. Adding them on pullbacks can be a great opportunity. Here are two energy stocks to add on weakness in October.
Canadian Natural: The GOAT of Canadian energy
Canadian Natural Resources (TSX:CNQ) is the GOAT (greatest of all time) in the Canadian energy patch. Despite oil prices having dropped 21% over the past year, CNQ stock has held up very well.
Part of the reason is because CNQ is the largest energy producer in Canada. The other part is that it is one of the most efficient and profitable producers as well.
The large independent energy producer has a very low cost of production. It can generate positive cash flow at any price above the mid-$40 per barrel range. The company operates like an efficient machine. Decades of reserves mean that it can maintain and even grow production with only incremental expense.
This Canadian energy stock is taking advantage of the sector downturn to become even larger. It just announced a substantial $6.5 billion deal to buy Chevron’s Canadian oil sand portfolio. The assets are already in areas it operates, so the acquisition is expected to be quickly accretive.
Canadian Natural yields 4.4% today. It just raised its dividend (again) after 25 years of consecutive increases. It is not the cheapest energy stock, but it deserves a premium for its royalty-like cash flow structure.
Tourmaline: A top natural gas play
Tourmaline Oil (TSX:TOU) would be the next highest quality stock on this list. It is the largest natural gas producer in Canada. Like CNQ, the company has taken advantage of the commodity downturn.
In the past few years, it purchased Crew Energy and Bonavista, drastically increasing its production capabilities in Western Canada.
Tourmaline owns most of its own infrastructure. As a result, it can operate at a very low cost. The size and scale of Canada’s largest natural gas producer help it to operate efficiently and profitably. It also gives it clout when negotiating egress, and the optionality to market its production to the highest priced markets.
This energy stock has a top management team who have a large stake in the business. Likewise, Tourmaline’s balance sheet is pristine with minimal net debt. Even at depressed prices, it has been able to pay attractive special dividends and grow its base dividend.
Natural gas prices only need to rise a bit for its free cash flow profile to rise substantially. With prices at a low, patient investors can significantly benefit when the pricing market starts to turn around.
