Canadian oil stocks used to be a filthy asset class. However, since 2020, these stocks have steadily been gaining popularity with both retail and institutional investors.
In the past five years, the sector has significantly consolidated and outperformed. The best producers drastically reduced debt and cleaned up their balance sheets. Likewise, they focused on the most economic assets and drilling opportunities.
As result, Canadian oil stocks are lean, cash flow machines. Since the Iran war pushed oil prices skyward, Canadian oil stocks are set to enjoy a major windfall. Suncor Enbridge (TSX:SU), Enbridge (TSX:ENB), and Canadian Natural Resources (TSX:CNQ) are some of Canada’s best known energy stocks. Here’s why each has its investment merits and why you might want to prefer one over the other.
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Suncor Energy: A top integrated oil stock
With a market cap of $104 billion, Suncor Energy is Canada’s top integrated oil stock. It produces 855,000 barrels of oil per day and refines 466,000 barrels of oil per day. It also has a large retail distribution network through 1,640 Petro-Canada retail locations and 320 commercial Cardlock locations.
Suncor’s stock lagged for several years due to underperforming operations and safety issues. However, its new management has largely cleaned up the business.
With a strong balance sheet today and a mix of long-life assets (25 years of reserves), Suncor has committed to returning 100% of its excess cash flows to shareholders. It has also committed to growing its dividend by 3-5% per year. It yields 2.73% today.
This is a good stock if you want a diversified mix of assets that generate strong cash flows. While this oil stock has a lower yield, capital returns will come as it steadily retires its share count.
Enbridge: A top pipeline stock
Enbridge is Canada’s top energy infrastructure stock with a market cap of $156 billion. 30% of oil produced in North America is transported through Enbridge’s pipelines. 20% of the natural gas utilized on the continent go through its network.
It just speaks to how essential this company is to the North American economy. Unlike Suncor, Enbridge is much less exposed to the price of oil or gas. It operates a tolling business. 98% of its business is contracted or regulated.
Enbridge does carry a lot of debt, so it can be sensitive to rising interest rates. Its stock yields 5.4% and management has an eye to keep growing that dividend by a low singled digit annualized rate.
Canadian Natural Resources: A top oil stock
With a market cap of $128 billion, Canadian Natural Resources is Canada’s largest energy producer. This oil stock is solely focused on what it good at: energy production. It produces over 1.6 billion barrels of oil and natural gas per day!
This is one of Canada’s best run companies. It can sustain its dividend and operations, even if energy prices dropped to the mid-40’s. It has decades of energy reserves on hand.
With oil trading over $100 per barrel, it should be set to see a massive windfall. In the past, it has been known to pay very nice special dividends when the price of oil is elevated. It yields 4% and has a 26-year history growing that dividend.
You buy this oil stock if you want to own the best of the best for operations, shareholder friendliness, and dividend growth. Its valuation is elevated, but sometimes you get what you pay for.
