Investing in one’s strengths gives you the advantage of better returns and lower risk. Each economy has its strengths. Canada’s strength is its fourth-largest oil sands reserves in the world, its proximity to the world’s largest oil consumer – the United States, and a pipeline infrastructure that makes oil exports cost-efficient. However, the tariff war has stirred up cordial trade relations between the U.S. and Canada. America has imposed a 10% tariff on Canadian oil exports, which has reduced the realized price for energy producers.
Top energy producers that are a great buy right now
While Canadian energy producers felt the heat of tariffs, they had other alternatives in their arsenal to absorb the tariff and still report profits.
Some business models are volume-driven, whereby sales are higher than profits. Here, the business has a commoditized or regulated product or service that does not command a premium price but has assured demand. Utility, logistics, telecom, food, agriculture, and oil fall under this category. For such businesses, operating efficiency makes a significant difference in profitability. You will see the company’s management constantly cutting costs and optimizing resources to match demand fluctuations.
Here are two energy producers that are a great buy right now for their cost efficiency.
Canada’s largest energy producer
Canadian Natural Resources (TSX: CNQ) has three things in its arsenal:
- A diversified product mix of synthetic crude oil (SCO), West Texas Intermediate (WTI) crude, natural gas, and natural gas liquids (NGL).
- Long-life, low-decline, low-maintenance reserves that enable the company to increase production cost-efficiently.
- A diversified market – Alberta Energy Company (AECO), exports to other North American and international markets, and internal consumption.
The company’s second-quarter earnings reflected the impact of the 10% tariff on Canadian oil imports. The realized price for crude oil and NGL fell 20% while that for natural gas increased 62% year-on-year. However, the energy producer offset the price disadvantage by increasing its crude oil and NGL production by 9% and natural gas production by 14%. Higher production reduced its production expense. Moreover, its royalty payments reduced as the realized price reduced. This helped mitigate the impact of lower realized prices on net earnings.
Canadian Natural Resources’ stock price fell 4.8% after the earnings release on August 6. Its revenue fell 9% year-on-year, and adjusted funds per share fell 7.7% to $1.55, which is sufficient to meet its quarterly dividend per share payment of $0.5875.
The company has been growing its dividend during the worst oil crisis:
- During the 2014 US shale gas exploration, the oil price fell from US$100 to US$60/barrel.
- In the 2020 pandemic, the global lockdown reduced oil demand, and the oil price fell to US$42/barrel.
Its disciplined capital allocation and controlled balance sheet leverage help it thrive in every crisis. This makes Canadian Natural Resources an energy producer to invest in amidst tariff uncertainty.
Canada’s second-largest integrated oil company
Imperial Oil (TSX: IMO) is another energy producer that only produces oil, WTI, SCO, Western Canadian Select (WCS), and bitumen. It is Canada’s second-largest integrated oil company, with ExxonMobil as its major shareholder.
Unlike Canadian Natural Resources, Imperial Oil is involved in both the upstream and downstream oil business. In the upstream, it produces oil; while in the downstream, it refines and sells oil. When upstream revenue is slow, high growth in the downstream mitigates the impact of oil price fluctuations.
Like all energy producers, Imperial Oil witnessed a decline in realized prices of WTI and SCO, which reduced its net income by 16% in the second quarter. However, higher volumes and lower royalties reduced the impact of lower oil prices.
Investor takeaway
Both oil companies have sufficient cash flow to pay dividends and service their debt while staying profitable. The two Canadian energy producers have a lower cost of production that helps them thrive even in a lower oil price environment.
