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.

| More on:
Natural gas

Image source: Getty Images

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.

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.

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.

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.

More on Energy Stocks

oil pump jack under night sky
Energy Stocks

Better Energy Stock: Brookfield Renewable or Northland Power?

Renewable stocks have a strong outlook, but which of these two are the best to buy?

Read more »

Super sized rock trucks take a load of platinum rich rock into the crusher.
Energy Stocks

Where Will Suncor Stock Be in 3 Years?

Suncor continues to drive operational efficiencies and value. Expect this momentum to drive Suncor stock higher.

Read more »

oil and natural gas
Energy Stocks

Outlook for Canadian Natural Resources Stock in 2025

We can expect more of the same for Canadian Natural Resources stock in 2025: strong production, returns, and shareholder value…

Read more »

Canadian energy stocks are rising with oil prices
Energy Stocks

What to Know About Canadian Energy Stocks in 2025

Energy stocks like Canadian Natural Resources are well-positioned to benefit from strong energy markets in 2025.

Read more »

data analyze research
Energy Stocks

Enbridge Stock Has a Nice Yield, But This Dividend Stock Looks Safer

Don't be fooled by a pretty dividend yield. Dig deeper to find the real golden goose.

Read more »

Oil industry worker works in oilfield
Energy Stocks

Better Energy Stock: Suncor vs Canadian Natural Resources?

Investors are wondering if Suncor (TSX:SU) or Canadian Natural Resources (TSX:CNQ) are undervalued and good to buy for a TFSA…

Read more »

dividends can compound over time
Energy Stocks

3 No-Brainer Energy Stocks to Buy Right Now for Less Than $500

Energy stocks offer returns, dividends, and more. But which offers the best long-term buy?

Read more »

3 colorful arrows racing straight up on a black background.
Energy Stocks

A Canadian Energy Stock Poised for Big Growth in 2025

The energy sector has faced a lot of changes this new year, so is this energy stock going to sink…

Read more »