1 Canadian Energy Stock to Buy Confidently and 1 to Avoid for Now 

The Canadian energy sector is witnessing strong momentum amid geopolitical tensions. Here is an energy stock to buy and one to avoid.

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Canada’s energy market is lucrative. The country has the fourth-largest global supply of proven oil reserves and the third-largest reserves of uranium. Moreover, solar and wind are some of the fastest-growing sources of energy. Canada is also the largest exporter of oil and gas to the United States. Thus, you see a variety of energy stocks on the TSX, from companies that extract oil and gas to gas utilities to gas pipeline companies that transmit to the United States, to green energy companies.

However, not all energy stocks are a good buying option. The energy sector is capital intensive and only a few have the cost advantage to make you buy them confidently.

A Canadian energy stock to buy

Energy infrastructure companies have the advantage of earning toll money for transmitting oil and gas between countries and provinces. However, they carry a significant risk of cost overruns as it is increasingly difficult to build pipelines due to environmental concerns and approvals.

TC Energy stock

TC Energy (TSX:TRP) has an advantage. Its Coastal GasLink pipeline is the first direct pipeline that opens Canada’s liquified natural gas (LNG) to the world. North American LNG exports to Europe and Asia are a huge market to tap. However, the Coastal GasLink pipeline went into significant cost overruns from the initial estimate of $6.6 billion to the actual cost of $14.5 billion. TC Energy wrote off billions in losses that pulled its stock price down in 2022 and 2023.

Now is the time to reap the benefits of this natural gas pipeline. To extract more efficiencies and value, the company also spun off its oil pipeline business and named it South Bow. TC Energy’s share price has picked up since July as interest rate cuts began and the spin-off materialized in October. The outlook is bright for TC Energy as US president-elect Donald Trump favours oil and gas energy resources. Faster approval of projects could be on the cards, which could help TC Energy accelerate the execution of high-value projects and tap LNG exports.

Debt is a risk for TC Energy, but the company expects to bring the debt to its upper target limit of 4.8 times its EBITDA (earnings before interest, taxes, depreciation, and amortization) in the long term. It expects to grow its dividends by 3-5% for the coming three years and by 5% later as it taps the LNG export market.

A Canadian energy stock to avoid

While TC Energy is focusing on high-value projects, Algonquin Power & Utilities (TSX:AQN) is offloading assets. It has sold its renewable energy business for $2.5 billion to focus on regulated energy services that have stable cash flows. The restructuring and efforts to lower the debt are ongoing.

The company is still trying to survive and has yet to show any signs of growth. In the third quarter, AQN even reduced its dividend per share by 40%, after slashing them by 40% in 2023. Two sharp dividend cuts in two years, a $7.5 billion debt, and a $5.1 billion market capitalization show that debt is still a concern.

Algonquin Power & Utilities stock has lost over 60% of its value in the past two years. And the fall is for the weak fundamentals. Even a 5.4% yield does not make it look attractive, as this dividend is at risk. Moreover, Trump could cut subsidies for renewable energy, making them less attractive.

Final takeaway

A sector may be attractive, but not all stocks in the industry are attractive. Whenever you are bullish on a sector, make sure to also read about the companies that are well-placed to tap that growth.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Puja Tayal has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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