The energy sector is a significant contributor to Canada’s gross domestic product, as the country has the fourth-largest oil sands reserves. Investing in a country’s strength can help you fetch better returns. Since the pandemic and geopolitical tensions stirred up the global oil and natural gas supply chain, energy stocks have revived. North America now has Europe as a new customer for its natural gas. Several Canadian companies operating in the energy sector could stand to benefit from this shift in the supply chain in the long term.
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A smarter way to invest in Canadian energy stocks
Canada has some attractive dividend-paying energy stocks. You can opt for an energy ETF and also invest throughout the energy supply chain to maximize returns from this energy upcycle.
Energy production stocks
Energy-producing companies are exposed to oil and gas prices. A smart investment is to buy a company that has one of the lowest production costs. That company can sustain a downturn and benefit from an upturn. Canadian Natural Resources (TSX: CNQ) has that cost advantage thanks to its slow-depleting, low-maintenance oil sands reserves. It has a West Texas Intermediate (WTI) breakeven of mid-$40/barrel after including maintenance and dividend payments.
This ensures the company can continue paying dividends even at US$50/barrel. When WTI prices fall, the company shifts its product mix to high-margin Synthetic Crude Oil, ensuring high free cash flow.
Another stock involved in energy production is Freehold Properties (TSX: FRU). It does not produce oil but owns oil wells in the United States and Canada and earns royalty revenue from them. It gets a 43% premium from its U.S. portfolio as it has higher-quality light oil and access to the Gulf Coast market. The royalty amount is determined by oil prices and quantity produced. Its expense is limited as all operational risk is borne by oil companies who extract oil from Freehold’s oil wells. This makes Freehold Properties a smart choice for the energy sector.
Energy infrastructure stocks
Energy-producing companies are still exposed to oil price volatility. This risk can be balanced by investing in a gas pipeline company. TC Pipelines (TSX: TRP) pays dividends from its toll money to transmit natural gas. The toll money is determined by the volumes transmitted, and the toll rate is adjusted for inflation. The company has been investing heavily in building gas pipelines to tap the North American liquefied natural gas export opportunity.
It faced project delays and even wrote off billions in the Coastal GasLink pipeline, which went way over budget. Those risks are past, and it will now reap the benefits of the projects that have come online for years to come. Trump tariffs on energy exports are unlikely to affect its earnings unless they alter the energy supply chain.
Not exactly an energy stock, but an independent power producer, Capital Power (TSX: CPX) is a good investment. It acquires, develops, and operates power-generation facilities in Canada and the United States. I am bullish on this stock as it is tapping the energy needs of data centres in the United States. The amount of energy data centres will consume makes energy projects supplying them a good source of future passive income. Capital Power is also a strong dividend payer with 11 years of dividend growth history.
Investor takeaway
Energy stocks are a good source of dividends in Canada. However, investors should diversify their portfolio across sectors and different types of stocks, such as growth stocks, which can help them generate wealth. Remember, your stock pick should match your investment goal and risk profile.
