Is Natural Gas the Smart Energy Investment Right Now?

For investors interested in energy, it’s essential to look at the businesses and their fundamentals, not just the asset they are focused on.

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There is a significant energy shift going on, and it has impacted multiple industries. With the world focusing on renewables and pulling away from fossil fuels, it’s challenging to invest in or stay committed to energy stocks. But considering the energy demand, oil price movements, and several other factors, it’s clear that we are years, possibly even decades, from when conventional energy demand slumps enough to make energy investments completely unviable.

Even then, it’s prudent to choose the right fossil fuel to invest in and not add unnecessary risk to your portfolio. Natural gas seems like the safest contender, but it’s important to choose the right natural gas companies. Even if the underlying asset is safe, a fundamentally weak company may lead to disastrous return scenarios and losses for investors.

Largest natural gas producer in Canada

As the largest natural gas producer in the country, Tourmaline Oil (TSX:TOU) has a significant edge over its peers, at least assuming the demand doesn’t go down significantly enough shortly. According to current estimates, the demand for natural gas in Canada and the international market as a whole is expected to increase. Another edge the company has is that as a midstream giant (fourth largest in the country), its transportation costs and reliance are manageable.

Created with Highcharts 11.4.3Tourmaline Oil PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.ca

The company also boasts a significant drilling inventory—at least seven decades—which positions it as a solid long-term energy pick from a business model and fundamental strengths perspective. However, it’s also important to see how these strengths translate to performance and returns.

Tourmaline Oil incurred some of the heaviest losses after the 2014 crash and didn’t recover until the post-pandemic bull market pushed the entire energy sector up. It demonstrated exceptional growth in that period, going up almost 1,000% from the lowest point in its market crash to its peak in 2022. It’s valued attractively now, but this kind of growth is highly improbable in the absence of another catalyst. Plus, the 2% yield doesn’t promise significant returns from that angle.

A natural gas pipeline company

TC Energy (TSX:TRP) is one of the largest pipeline companies in Canada. Unlike some other pipeline giants trading in the country, it’s almost entirely focused on natural gas. It transports almost 30% of all natural gas consumed in the U.S., Canada, and Mexico. More importantly, its pipeline is connected to most of the regions where natural gas demand is increasing and expected to increase well into the next decade.

Created with Highcharts 11.4.3Tc Energy PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.ca

It has other businesses as well, but this midstream business makes up about 90% of the expected earnings before interest, taxes, depreciation, and amortization. More importantly, TC Energy also boasts a strong performance history. It was one of the few stocks that made a swift recovery after the 2014 crash, but it experienced another crash before the pandemic and recovered from that as well. This shows its resilience as a holding. It’s also an influential dividend aristocrat offering a modestly decent yield at 4.7%. The long-term growth potential and yield make it a more compelling pick.

Foolish takeaway

While natural gas is an intelligent energy pick right now, not all natural gas stocks are worth considering. Among these two, TC Energy seems like a more compelling pick, even if a bear market phase knocks Tourmaline Oil down and pushes its yield up. That’s because its performance history doesn’t inspire much confidence, and a sector-wide slump might make TC Energy’s yield much more attractive.

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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 Adam Othman has no position in any of the stocks mentioned. The Motley Fool recommends Tourmaline Oil. The Motley Fool has a disclosure policy.

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