Canadian Natural Resources (TSX:CNQ) and Suncor (TSX:SU) are giants in the TSX energy sector. Contrarian investors who have a bullish outlook on energy prices are wondering if SU stock or CNQ stock is now undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio focused on dividends and total returns.
Suncor stock price
Suncor is up about 16% in the past 12 months, but the ride has been choppy through much of the year with multiple bounces and subsequent pullback between $50 and $55.
Weaker oil prices are responsible for the pullback in recent months.
Suncor is best known for its oil sands production operations, but the company also has several refineries that turn crude oil into end products, which include plastics, gasoline, jet fuel, diesel fuel, and asphalt. In addition, Suncor has a network of retail locations that sell fuel and snacks under the Petro-Canada brand.
The diversified operations along the value chain historically appealed to investors. When oil prices decline, the refineries benefit from reduced input costs, and fuel sales can tick up as costs fall at the pumps. This helps offset the drop in margins on the production, or upstream, operations.
Suncor fell out of favour with the market during the pandemic when management slashed the dividend to preserve cash flow. The board subsequently restored the dividend to its previous level and increased it to a new high, but investors still remained hesitant. Safety issues and high operating costs also hurt the stock.
In 2023, Suncor brought in a new chief executive officer to get the company back on track. Suncor has trimmed staff to reduce expenses and sold its renewable energy assets to focus on its core businesses. A strategic review resulted in the decision to keep the refining and retail businesses. There had been some activist pressure to monetize the retail operations. At some point, that option might be revisited, but the current strategy is to keep the integrated structure in place.
The stock’s positive performance in the past year is an indication that investors are seeing progress on the turnaround efforts. Investors who buy SU stock at the current level can get a dividend yield of 4.6%.
Canadian Natural Resources stock
CNRL trades near $42 per share at the time of writing. The stock is down about 3% over the past year and is off about 11% in just the past month.
As with Suncor, CNRL has extensive oil production assets that include oil sands, conventional heavy oil, conventional light oil, and offshore oil operations. CNRL is also a major producer of natural gas and natural gas liquids.
The company doesn’t, however, own refineries or retail locations. Weak oil prices are largely to blame for the drop in the share price. Natural gas prices, on the other hand, are near their highs for the year.
CNRL’s share price has outperformed Suncor in recent years. Investors like the fact that the company is efficient and nimble at moving capital around the asset portfolio to take advantage of positive moves in commodity prices. CNRL has a solid balance sheet and is good at taking advantage of drops in energy prices to acquire strategic assets at attractive valuations.
The board raised the dividend in each of the past 25 years. This is important to consider, given the volatile nature of oil and gas prices. At the current share price, CNQ stock provides a dividend yield of 5.3%.
Is one a better pick?
Oil prices are expected to remain under pressure in 2025 due to weak Chinese demand and higher output from non-OPEC countries. As such, investors might see a better entry point emerge in both stocks in the coming months.
That being said, dividend investors and energy bulls can take advantage of the recent pullback. At the current share prices, investors seeking passive income might want to make CNQ the first choice right now for the better yield.
