Oil prices have rebounded in recent weeks, sending energy stocks higher. Investors who missed the bounce are wondering which TSX stocks in the energy sector might still be undervalued and are good to buy right now for a self-directed Tax-Free Savings Account (TFSA) focused on dividends.
Oil market outlook
West Texas Intermediate (WTI) oil trades near US$73 per barrel at the time of writing. It was as low as US$57 in early May. The first leg of the rally occurred as bargain hunters started to bet that the United States and China will come to a trade agreement in the next few months to avoid pushing both countries, and the rest of the global economy, into a serious recession. The U.S. and China are the two largest oil markets, so a weakening economic situation would put a dent in demand and make an already oversupplied oil market even worse.
In recent days, the spike is due to geopolitical tensions in the Middle East. Oil initially moved higher on news that the U.S. was pulling its non-essential staff out of Iraq and other countries in the region. Israel’s subsequent attacks on Iran’s nuclear facilities sent oil prices much higher on June 13.
Additional upside in the oil price is possible in the coming days and weeks if markets start to worry about the risk of a wider conflict in the region, or if Iran moves to close the Strait of Hormuz where roughly 20% of oil passes on route to international markets.
If the geopolitical tensions ease, the price of oil will again start to trade according to fundamentals. Energy analysts broadly expect the market to remain oversupplied into 2026. Economic weakness caused by tariffs and supply expansion by non-OPEC countries, including Canada and the United States, would likely keep oil prices under pressure. A return to US$60 for WTI wouldn’t be a surprise.
As such, investors need to be nimble and should consider stocks that pay good dividends and have strong balance sheets to ride out the turbulence.
Canadian Natural Resources
Canadian Natural Resources (TSX: CNQ) is a good example of a top dividend stock in the Canadian energy sector that should offer decent upside potential. CNQ trades near $45.50 per share at the time of writing. The stock is up about $10 from the April low, but it is still down from the $52 it reached in the fall last year.
CNRL is both an oil and a natural gas producer. The oil assets span the full spectrum, including oil sands, conventional heavy oil, conventional light oil, and offshore oil production. The energy producer also has vast natural gas resources in Western Canada. The natural gas operations can provide a good revenue hedge when oil prices are weak, as was the case in recent months.
The company has a good track record of making large acquisitions at opportune times in the energy cycle and then benefitting as prices rebound. CNRL continues to be a very efficient business, moving capital around the portfolio to take advantage of shifts in commodity prices.
This flexibility, along with a strong balance sheet, has enabled CNRL to raise the dividend in each of the past 25 years. Investors who buy CNQ stock at the current price can get a dividend yield of 5.1%.
The bottom line
Oil prices will likely remain volatile in the coming months, so investors need to be able to handle the moves if they decide to own oil producers. That being said, CNRL offers a solid dividend that should continue to grow, so you get paid well to ride out the turbulence. If you are an energy bull and have some cash to put to work, this stock deserves to be on your radar.
