Canadian energy stocks are back in vogue now that oil prices have shot over $100 per barrel. The conflict between Iran and the United States has revealed that the Strait of Hormuz is a major global energy supply lynchpin.
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Canadian energy stocks could enjoy outsized cash flows for some time
Not only have energy production/infrastructure been damaged, but the ability to transport energy has been massively inhibited. Even if the conflict were to be resolved today, it will take months for stranded energy shipments to reach their final destinations.
Likewise, many countries’ energy reserves have been significantly depleted. This means that it will take months (or even years) to bring those back to sufficient levels.
All this to say that the price of energy is not likely to massively decline any time soon. Many experts believe $80 per barrel could be the new normal for some time. That all means a big tailwind of cash is heading towards Canadian energy stocks.
Cenovus Energy: Winning on all fronts
If you want large-cap exposure, Cenovus Energy (TSX: CVE) is one of the most interesting Canadian energy stock picks today. It has a market cap of $74 billion today. After its recent takeover of MEG Energy, Cenovus now sits as one of Canada’s largest integrated energy producers.
It produces around 972,000 barrels of oil equivalent (BOE) per day and refines around 460,000 BOE per day. For several years, Cenovus’s refinery business has been a drag on financial performance. However, today, its refineries are near full capacity and are enjoying higher margins from lower operating costs and higher fuel pricing.
Decades of reserves and strong cash flows
Cenovus has 28 years of energy reserves. Its oil sands operations have some of the lowest-cost production among its peers. It has six consecutive years of double-digit dividend growth under its belt. It expects to keep growing its dividend by a +10% annualized rate.
The cash windfall from elevated energy prices will help Cenovus reduce its debt burden from the MEG Energy acquisition. It has $8.1 billion of net debt. However, it has a target of $4 billion.
It generated $1.7 billion of excess free fund flows in the first quarter alone. If oil prices remain elevated through the rest of the year, Cenovus could go a long way toward hitting its net debt goals sooner than it expected. That also means this Canadian energy stock will be closer to returning 100% of its excess cash flows back to shareholders.
Not a cheap energy stock, but still good potential for strong total returns
Certainly, Cenovus stock is no longer cheap like it was a couple of years ago. Its stock is up 69% in 2026 and 141% over the past year. In the past three years, its free cash flow yield has compressed from 16% to 5.4% today!
However, this Canadian energy stock has significantly expanded its asset base and improved its overall operating structure. Today, it has attractive growth prospects.
Even though it is not cheap, you can collect its 2% dividend yield and likely many years of dividend growth ahead. Once Cenovus hits its debt targets, there are substantial cash returns coming towards shareholders. There are still good chances for attractive total returns in the years ahead.
