Canadian oil and gas stocks, whether it be Canadian pipeline companies, oil producers or natural gas producers, are faced with economic conditions that have simply never been seen before.
COVID-19 wreaked havoc on all Canadian energy companies as the demand for oil plummeted, and cash flow was severely impacted.
And as these once popular Canadian stocks fell, dividend yields rose and they became attractive opportunities. Many who knew the industry was beat down loaded up on oil and gas stocks, and are seeing some nice returns.
So, are Canadian oil stocks and Canadian pipeline stocks still worth it today?
In short, yes they are. There are numerous options when it comes to Canadian energy companies with a strong focus on oil.
Although we are expected to hit peak demand by 2030 according to some experts as the transition to renewable energy companies continues, we will still be producing the commodity for the foreseeable future.
With this, we will need oil companies to produce the commodity and pipelines to ship it.
As such, you'll see a mix of Canadian pipeline stocks, Canadian oil stocks and our winner on this list is actually a Canadian natural gas producer that held up admiringly well in 2020 and continues to do well in 2021.
These oil stocks are still trading at discounts, and are currently facing significantly volatility. If you're new to buying stocks, volatility is simply the overall velocity of the movements in a stocks price.
However, as a short to mid term play, we expect most of these stocks to outperform on a re-opening of the economy, as oil demand due to travel restrictions easing will most certainly launch.
**Bonus** - An alternative option for those looking for broad oil exposure in XEG.TO
Yes, we know this post is supposed to be a list of the best Canadian oil and gas stocks. However, there is no doubting the fact that it may be wise to gain broad exposure to the industry rather than buying individual producers and hoping they're successful.
So how do you get this exposure on a producer level? Well, one of the most popular ways is buying the iShares S&P/TSX Capped Energy Index ETF (TSE:XEG). This is an ETF that tracks some of the largest oil producers in the country, including Suncor Energy, Cenovus, Tourmaline, Canadian Natural Resources and more.
The ETF has $1.4B in assets under management and has fees of 0.61%. You'll have no problem trading shares either, as daily volume often exceeds 1.2 million shares.
You won't get any pipeline exposure out of this ETF, so it is important to keep reading this post, as it does include some!
With that being said, lets move on to the top oil and gas stocks to buy in Canada today.
What are the best Canadian oil and pipeline stocks to buy today?
5. Parkland Fuel (TSE:PKI)
The energy sector is broad, and one segment that investors often forget about is the distribution and marketing of fuels and lubricants. Best to pay attention, as there are some strong companies in this industry.
One such company is Parkland Fuel (TSE:PKI). Parkland is one of the countries largest independent suppliers and marketers of fuel and petroleum products. It also has a leading network of convenience stores.
Parkland has been one of the best growth stocks in the energy sector over the last half decade.
It has grown revenue and earnings by an annual average of 20% and 50% respectively over the past five years.
How was the company achieved such an impressive growth record?
Parkland is a serial acquirer and has been scooping up the competition at a significant pace. Over the past three, it has closed on six transformative acquisitions.
Unfortunately, the pandemic impacted the company’s bottom line. There is less traveling and working from home has impacted the demand for fuel. As a result, revenue dropped by 24% in fiscal 2020.
Not surprisingly, its share price has struggled well into 2021.
However, the impact is expected to be temporary and the worst appears over. Once demand for fuel rises, Parkland will certainly rebound. In fact, it's rebounding as we speak and investor simply aren't taking note.
In fact, it is trading at a steep discount (38%) to analysts estimates which have a unanimous ‘buy’ rating and an average one-year target of $49.87 per share.
In fact, it is trading below even the lowest street target of $43.00 per share.
Simply put, this is a rebound play that doesn't quite have the "reopening" priced into, much like a lot of other reopening stocks.
As investors wait for the rebound, they can also enjoy a safe and reasonable 3.45% yield from this Canadian Dividend Aristocrat which has raised the dividend for seven consecutive years.
10 year performance of Parkland Fuel vs the TSX
4. Canadian Natural Resources (TSE:CNQ)
We understand – it is very difficult to invest in oil producers.
There is a notable shift to renewables and the demand for oil cratered during the pandeimc. However, demand is now rebounding and although it may not reach 2019 levels for years, declining production will support prices.
There are similarities between current oil commodity crisis and what transpired with gold in the early 2010s. At that time gold stocks were highly leveraged which led to significant write-downs, dividend cuts and bankruptcies.
Sound familiar? The winners in the years that followed were those with low leverage and low costs.
In the oil industry, there is arguably no better operator than Canadian Natural Resources (TSE:CNQ). The company is one of the lowest cost producers and can maintain positive cash flows despite low oil prices.
On a corporate level, CNQ’s break even part is approximately ~$30/barrel – the lowest among oil sands producers.
What does this mean exactly? It means that the dividend is sustainable at WTI prices above this price point. In fact, the company came out with a dividend raise in early March of 2021, a double digit raise of 10.6%. When numerous junior producers and even one of the largest producers in the country Suncor were cutting dividends, Canadian Natural was boosting it.
The company is now yielding in the low 4% range and unlike some of the majors, has been able to navigate the crisis without a cut. It also has a 20-year dividend growth streak, which makes it one of the best income stocks in the country.
If oil continues to however around US$70/barrel then CNQ is one of the best options in the industry. If oil rises on a surge in demand? In this case, Canadian Natural would benefit significantly.
Simply put, this is a low cost, disciplined operator that is one of the best producers in the industry.
10 year performance of Canadian Natural vs the TSX
3. TC Energy (TSX:TRP)
When it come to energy stocks, some of the best in the industry are midstream companies. Why?
They are less susceptible to the price of oil. Although they are vulnerable to lower throughput volumes, and bankruptcies from some of the smaller oil & gas companies, earnings are still underpinned by long-term contracts. One of the industry’s best is TC Energy (TSE:TRP).
In 2020, TC Energy was shaping up to be the best performing pipeline of the year, until it fell drastically in price to close out the year.
I think this was primarily from the cancellation of the Keystone pipeline, which has been all but an albatross for the company for some time now. In my eyes, the cancellation doesn't mean much. The company still has over $27 billion in projects in its pipeline, pun intended.
Furthermore, it is one of the best performing pipelines in the country. The company’s status as one of the premier midstream plays has enabled it to weather the current crisis better than most.
Specifically, how has the current crisis impacted the company?
“Despite the challenges brought about by COVID-19, our assets have been largely unimpacted” – a strong statement by leadership.
Furthermore, outlook remained unchanged as 95% of EBITDA is underpinned by regulated assets and/or long-term contracts.
Despite thoughts to the contrary, TC Energy is also expected to grow at a decent pace. Through 2023 it expects to spend $37 billion on critical infrastructure across North America.
The company is also one of the premier income stocks on the TSX Index. It pays an attractive yield north of 5.5% which is underpinned by strong cash flows. In fact, the company re-iterated dividend growth guidance of 8-10% annually through 2021.
Post 2021, it expects the dividend to grow at a compound annual growth rate of 6% at the mid-range.
Without a doubt, TC Energy deserves a mention whenever we talk about the top energy stocks in the country.
10 year performance of TC Energy vs the TSX
2. Enbridge (TSE :ENB)
We could have just as easily swapped Enbridge (TSE:ENB) and TC Energy in our rankings. We want you to keep this in mind, both of these pipelines are interchangeable in our eyes. So don't fret about one ranking higher than the other.
Much like TC Energy, Enbridge is one of the best midstream companies in the country. What gives Enbridge the slight edge? The dividend.
At 25-years, Enbridge has one of the longest dividend growth streaks in the country.
It also currently yields a hefty 6%+, which is above historical averages. Is the dividend safe?
The dividend accounts for only 70% of distributable cash flow which is inline with the company’s target. As such, there is no reason for concern here.
Beyond 2022, Enbridge expects the dividend to be grow inline with DCF which is expected to grow by 5-7% annually. The company has also deleveraged, and current debt loads are within its targeted range of 4.5 to 5.0x EBITDA.
The good news? Enbridge’s leverage ratio is expected to drop below this level in 2021.
As of writing, Enbridge is currently trading at only 16.3 times forward earnings and 1.8 times book value. Both are considerably below the company’s five-year average of 19.44 and 2.33 respectively. It is also trading at a 8% discount to analysts one-year price target of $54.92 per share.
Overall, the company generates considerable cash flow and is expected to grow the business in the high, single digits. Can it achieve this growth?
Considering the company has only missed expectations once in the past three years, Enbridge is also one of the most reliable energy stocks on the Index in terms of execution.
10 year performance of Enbridge vs the TSX
1. Tourmaline Oil (TSE:TOU)
Let’s get right to the point – why is Tourmaline (TSE:TOU) among our top picks?
Simply put, it was the best producer to own in 2020. It is the only mid-to-senior tier producer that was in positive territory for 2020.
The five-year chart is nothing to get excited about. In fact, it has underperformed every one of the stocks on this list over that period. So, why this outperformance in 2020 and 2021?
First, Tourmaline is the largest natural gas producer in the country and is almost a commodity pureplay (~80% of production).
Natural Gas Liquids (NGLs), Condensate and Oil account for the remainder of volumes. Importantly, demand and subsequently the price of oil has been the most impacted energy commodity.
Since oil accounts for only 3% of production at Tourmaline, it wasn't impacted by record low oil prices.
It is however, still faced with low natural gas prices. Fortunately, it has been dealing with low natural gas prices for years and it is one of the industry’s lowest cost producers.
The company expects to generate revenue in excess of $4.29B in 2021, which would mark a 100% increase from 2019 levels.
The company has a disciplined approach in which it has targeted a leverage ratio of 1.0-1.5 times cash flow, with excess free cash flow used to raise dividends and buyback shares.
Furthermore, natural gas fundamentals seem to be improving. In fact, experts believe we should see steadily improving supply/demand dynamics through 2021.
The market dynamics for natural gas appear to be more stable than that of oil, as such Tourmaline is positioned to continue its strong performance relative to energy peers.