Canadian Oil Stocks – the Best Oil & Pipeline Stocks Today


The writer of this article may or may not have positions in the securities below. Current positions of the writer had no influence on the outcome of the research or stocks listed inside of this article.

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 has wreaked havoc on all Canadian energy companies as the demand for oil has simply plummeted.

And as these once popular Canadian stocks continue to fall, dividend yields are becoming higher and valuations are getting cheaper.

It’s more important now than ever to be choosing strong Canadian oil stocks and pipeline companies. Ones with low debt levels, low production costs and a strong market share. We witnessed in 2020 what can happen to junior oil and gas companies offering high, speculative dividend yields. The dividends get cut, and the stock prices crater.

Heck, we even saw this with a major producer in Suncor Energy (TSE:SU), that cut its dividend very shortly into the pandemic.

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 has held up admiringly well in 2020.

These stocks are trading at historical lows and are currently facing significantly volatility. Keep this in mind if you want to invest in any of these energy companies. It will not be an easy road to recovery, and we will need to put COVID-19 to bed for good before travel and the demand for oil can go back to 2019 levels.

If you’re looking to buy any of the oil stocks below, be ready to be extremely patient.

The Best Canadian oil and pipeline stocks to buy today

Parkland Fuel (TSE:PKI)

Parkland Fuel Logo

 

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. 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 has 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 44% last quarter.

Not surprisingly, its share price has struggled.

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 is trading at a steep discount (25%) to analysts estimates which have a unanimous ‘buy’ rating and an average one-year target of $46.00 per share. In fact, it is trading below even the lowest street target of $43.00 per share.

As investors wait for the rebound, they can also enjoy a safe and reasonable 3.30% yield from this Canadian Dividend Aristocrat which has raised the dividend for seven consecutive years.

5 year performance of Parkland Fuel vs the TSX

Parkland Fuels TSE:PKI Performance Vs TSX

Market Cap: $5.505 billion
Forward P/E: 134
Yield: 3.30%
Dividend Growth Streak: 7 years
Payout Ratio (Earnings): 120.24%
Payout Ratio (Free Cash Flows): Premium Members Only
Payout Ratio (Operating Cash Flows): Premium Members Only
1 Yr Div Growth Rate: 1.70%
5 Yr Div Growth Rate: Premium Members Only
Stocktrades Growth Score: Premium Members Only
Stocktrades Dividend Safety Score: Premium Members Only

4. Canadian Natural Resources (TSE:CNQ)

CNRL Logo

 

We understand – it is very difficult to invest in oil producers.

There is a notable shift to renewables and the demand for oil has cratered during this pandemic. However, demand will certainly rebound 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 ~$35/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. The company is now yielding 7.25% and unlike some of the majors, has been able to navigate the crisis without a cut. It also has a 19-year dividend growth streak, which makes it one of the best income stocks in the country.

Although we don’t believe the price of oil will rebound in a material way anytime soon, we also don’t expect the price to crater back to early-pandemic levels. If it continues to however around US$40/barrel, than CNQ is one of the best options in the industry.

Likewise, any upside from today’s price will likely lead to outperformance in the future. Canadian Natural had been outperforming the TSX Index fairly consistently prior to the COVID-19 crash in March, as you’ll see in the chart below.

Simply put, this is a low cost, disciplined operator that is one of the best producers in the industry.

5 year performance of Canadian Natural vs the TSX

TSE:CNQ Vs TSX 5 Year Chart

Market Cap: $27.6 billion
Forward P/E: 40
Yield: 7.25%
Dividend Growth Streak: 7 years
Payout Ratio (Earnings): 400%
Payout Ratio (Free Cash Flows): Premium Members Only
Payout Ratio (Operating Cash Flows): Premium Members Only
1 Yr Div Growth Rate: 11.94%
5 Yr Div Growth Rate: Premium Members Only
Stocktrades Growth Score: Premium Members Only
Stocktrades Dividend Safety Score: Premium Members Only

3. TC Energy (TSX:TRP)

TC Energy Logo

 

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 has lost only 16.96% of its value. We say ‘only’ because the S&P/TSX Energy Index is down by more than 50% this year.

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 5.43% yield 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.

5 year performance of TC Energy vs the TSX

TC Energy TSE:TRP Vs TSX 5 Year

Market Cap: $53.9 billion
Forward P/E: 14.24
Yield: 5.64%
Dividend Growth Streak: 19 years
Payout Ratio (Earnings): 70.28%
Payout Ratio (Free Cash Flows): Premium Members Only
Payout Ratio (Operating Cash Flows): Premium Members Only
1 Yr Div Growth Rate: 8.70%
5 Yr Div Growth Rate: Premium Members Only
Stocktrades Growth Score: Premium Members Only
Stocktrades Dividend Safety Score: Premium Members Only

2. Enbridge (TSE :ENB)

Enbridge dividend

 

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 24-years, Enbridge has one of the longest dividend growth streaks in the country.

It also currently yields a hefty 8.26% which is well 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 14.5 times forward earnings and 1.35 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 33% discount to analysts one-year price target of $52.10 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.

5 year performance of Enbridge vs the TSX

TSE:ENB Vs TSX 5 Year

Market Cap: $79.4 billion
Forward P/E: 14.70
Yield: 8.26%
Dividend Growth Streak: 24 years
Payout Ratio (Earnings): 126.56%
Payout Ratio (Free Cash Flows): Premium Members Only
Payout Ratio (Operating Cash Flows): Premium Members Only
1 Yr Div Growth Rate: 9.99%
5 Yr Div Growth Rate: Premium Members Only
Stocktrades Growth Score: Premium Members Only
Stocktrades Dividend Safety Score: Premium Members Only

1. Tourmaline Oil (TSE:TOU)

Tourmaline Oil

 

Let’s get right to the point – why is Tourmaline (TSE:TOU) among our top picks?

Simply put, it has been the best producer to own in 2020. It is the ONLY mid-to-senior tier producer that is in positive territory for the year. Up 8.08% year to date, it has crushed its peers and the S&P/TSX Energy Index.

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?

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 hasn’t been as 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.

In the first half of the year (which includes the full quarter of COVID-19), Tourmaline generated $508.9 million in cash flow ($1.88 per share) and expects to generate $1.05 billion by end of fiscal.

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.

5 year performance of Tourmaline vs the TSX

TSE:TOU Performance vs TSX Index

Market Cap: $4.4 billion
Forward P/E: 28.8
Yield: 2.92%
Dividend Growth Streak: 1 years
Payout Ratio (Earnings): 109%
Payout Ratio (Free Cash Flows): Premium Members Only
Payout Ratio (Operating Cash Flows): Premium Members Only
1 Yr Div Growth Rate: 24.32%
5 Yr Div Growth Rate: Premium Members Only
Stocktrades Growth Score: Premium Members Only
Stocktrades Dividend Safety Score: Premium Members Only

5 thoughts on “Canadian Oil Stocks – the Best Oil & Pipeline Stocks Today”

  1. Do I have to go through a Broker to Buy a Dividend Stock? What is the best way to buy into Dividend Stocks?

  2. Hey there Rick. You can reach out to individual companies to see if you can purchase their stocks without a brokerage. But more often than not, you will need one yes.

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