Canadian Natural Resources (TSX: CNQ) and Suncor Energy (TSX: SU) are giants in the Canadian energy sector. Investors who are bullish on oil prices over the coming years are wondering if CNQ stock or SU stock is undervalued right now and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio.
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Canadian Natural Resources
CNQ has a current market capitalization near $98 billion, making it the largest energy company on the TSX. The company’s size and balance sheet strength give CNQ the financial firepower to make large strategic acquisitions to drive revenue and cash flow growth.
Management recently announced a US$6.5 billion deal to buy Chevron’s Canadian assets, including a 20% interest in the Athabasca Oil Sands Project (AOSP) and a 70% operated working interest in light crude oil and natural gas liquids properties in the Duvernay play in Alberta. The AOSP purchase brings CNQ’s ownership of the project to 90%, while the Duvernay assets provide an opportunity for attractive near-term growth and a boost to cash flow.
Investors who bought CNQ at the 2020 low have enjoyed amazing gains, although the rally has slowed down in the past year. The stock is up about 6% in 2024 but has been quite volatile, roughly trading in a range between $40 and $55 over the past 12 months. At the time of writing, CNQ trades near $46.50.
CNQ just increased its dividend by 7%. This is the 25th consecutive annual dividend hike, which is rare in a sector that relies on volatile commodity prices for its revenue and profits. Management intends to give 60% of excess cash to shareholders once the Chevron deal closes and is using the rest to reduce debt, which increased a bit to complete the purchase. As cash flow rises and net debt drops below $15 billion, the company plans to give 75% of excess cash flow to shareholders. At net debt of $12 billion, the amount will rise to 100%.
CNQ’s advantage lies in its diverse product range. The company has oil sands, conventional heavy oil, conventional light oil, offshore oil, natural gas and natural gas liquids assets. Management is adept at quickly moving capital around the portfolio to take advantage of the best market opportunities.
Investors who buy CNQ stock at the current level can get a dividend yield near 4.8%.
Suncor
Suncor fell out of favour with investors in 2020 when it slashed the dividend to preserve cash flow. The company also struggled with safety issues and high operating costs, eventually leading to a chief executive officer change in the spring of 2023.
Since then, Suncor has trimmed staff, sold off its renewables business, and refocused, making its production, refining, and retail operations more efficient. The solid third-quarter (Q3) 2024 results indicate that the turnaround plan appears to be working. Suncor reported record refining throughput in the quarter, record refined product sales, and 99% upgrader utilization.
Suncor reduced its debt by $1.4 billion in the quarter, hitting its goal of reaching net debt of $8 billion. The improved balance sheet position means Suncor will now return 100% of excess cash flow to shareholders through dividends and share buybacks. The board announced a 5% increase to the dividend for 2025. Suncor has steadily raised the payout since the 2020 cut and now offers a distribution that is above the 2019 level.
Suncor trades near $57 at the time of writing. The stock is up about 33% this year. Investors who buy at the current level can get a dividend yield of 4%.
Is one a better pick?
Suncor offers the benefit of production, refining, and retail operations. CNQ is more of a pure play on energy prices. Both companies are in good shape and should continue to return significant cash flow to shareholders in the coming years. At the current share prices, I would probably split a new investment between the two stocks.
