With the Iran-U.S. conflict sparking a massive spike in oil prices, questions linger about the longer-term implications for the broad basket of oil producers. Undoubtedly, such oil shocks and related price hikes tend to be shorter-term in nature. As such, investors shouldn’t look for the top energy plays to rocket hand in hand with the price of oil. Either way, the energy stocks have been scorching, even before WTI (West Texas Intermediate) prices topped US$91 per barrel for the first time in a long time.
While oil prices will be impossible to predict, I think that structural tailwinds such as the boom in artificial intelligence (AI) could keep energy players on a steady footing for some number of years. In my view, the AI revolution stands out more as a multi-year or even a multi-generation structural tailwind for the price of oil. And while just about any oil and gas producer seems good enough to pick up at current levels, I do think that one name stands above the rest when it comes to value for money.
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Canadian Natural: My top oil pick for the next decade
These days, I think it’s hard to go wrong with shares of Canadian Natural Resources (TSX: CNQ), especially while they’re trading at less than 20.0 times trailing price to earnings (P/E). It’s a behemoth-sized producer with a $131 billion market cap and a history of spoiling its long-term shareholders through dividend increases.
With debts on the descent, oil prices in a decent spot, and operations in an even better place, I wouldn’t be surprised if more generous dividend raises were to be in the cards. With a 6% dividend hike recently served up and enough dry powder to buy back even more shares, it can make sense to buy and hold shares of CNQ and stop at that.
Even after a 50% surge in the past six months, the stock still looks cheap enough for buybacks. The real upside, in my view, is what could happen if oil is in a “higher for longer” kind of environment. Though I think US$90-100 oil isn’t sustainable over the long run, I acknowledge that there’s a possibility.
Either way, on the downside, Canadian Natural looks to be in good shape, even if prices were to plunge by more than 50% to around US$40 per barrel or so. Whenever you’ve got such impressive breakeven prices, you’ve got a dividend-growth titan that’s worth hanging onto, regardless of what oil prices are up to.
Add the potential for intensifying geopolitical conflicts beyond Venezuela or Iran, and there’s certainly potential for the return of US$100 oil. Of course, investors shouldn’t expect such a bull-case scenario. Either way, CNQ stock seems underpriced here, given its impressive operating economics and continued capital discipline.
The bottom line
Perhaps size is a big advantage when it comes to the major Canadian oil producers. And, in that light, CNQ stock remains a great pick for the next 10 years or maybe even longer. After all, the dividend (currently yielding 4%) just keeps getting better with every year, so hanging on for life might actually be the move!
