The Canadian energy patch continues to look like one of the more undervalued places in the Canadian stock market these days, even following the big gains posted earlier in the year. Indeed, the Iran war and blockage in the Strait of Hormuz could remain a problem for a while longer. And as discussions go nowhere, perhaps anticipating higher oil prices could be the way to go.
With higher energy prices, though, come higher costs for transport and just about everything further down the stream. As inflation flourishes again, I think a natural hedge is to consider the Canadian energy plays, given the generous dividends they pay out, which could help consumers stay afloat if inflation collides with weaker employment numbers.
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Canadian Natural Resources
Canadian Natural Resources (TSX:CNQ) shares might be one of the best mega-cap Canadian energy plays to pick up if you’re worried about a return of US$100 oil, the possibility of US$150, or maybe even a shocking surprise of US$170 oil or higher.
The longer that the Strait of Hormuz stays blocked, the more disruptive the impact as energy stores get exhausted. I have no idea when the blockage will pave the way for higher prices again. But if peace talks go nowhere, a return of +US$100 oil seems like the path of least resistance.
In any case, CNQ stock is dirt-cheap at 11.8 times trailing price-to-earnings (P/E) after fluctuating since peaking in the spring. With a nice 3.77% dividend yield that’s well-covered and poised for growth, perhaps CNQ is the obvious mega-cap bargain to consider, especially if you think oil will move higher rather than lower from here.
Enbridge
Enbridge (TSX:ENB) is a stellar midstream energy play that won’t be as choppy as oil makes its next move. As a standout pipeline play that will be busy transporting essential energy amid what could be a spike in demand for oil and gas, investors stand to benefit from a “toll booth” effect, so to speak, with less to worry about regarding the state of the Strait of Hormuz or how much higher or lower oil prices could move.
As it stands today, the yield sits at 5.0%, making it one of the most generous, well-covered payouts in the mega-cap Canadian market. You could go chasing for higher yields, but the added risks, I think, are not worth it. Might as well stick with a proven dividend-growth star in Enbridge, especially as it is experiencing strength right across the board.
Enbridge stock might be one of the market’s newest momentum heroes, but I see no reason to sell at 26.7 times trailing P/E. In my view, that’s a very fair price to pay for a firm with one of the widest physical economic moats out there.
The company is flush with cash flows, and much of it will be coming back to investors in the form of a dividend hike. What’s most interesting is how the AI-driven tailwind will affect the firm in the next 10-15 years.
Bottom line
It’s hard to pick between CNQ and ENB. I think they go well together. If I were forced to pick one, though, maybe ENB takes the cake for the higher yield and lower beta. Though CNQ does score higher for value and upside if another leg higher for oil happens.
