5 Top Canadian Oil Stocks To Buy In 2020
by Gaurav Sharma
Given the near-term value destruction in the oil and gas sector caused by the coronavirus or Covid-19 global pandemic, investors could be forgiven for deeming Canadian energy stocks as pretty toxic right now.
Afterall, the country's preferred benchmark – Western Canadian Select (WCS) – typically trades at a $10 per barrel discount to benchmarks in neighboring U.S., especially the more widely traded West Texas Intermediate (WTI). At the height of coronavirus lockdowns around the world in March, anecdotes of a Canadian crude barrels changing hands for less than a pint of beer in the Port of Vancouver, British Columbia - hub of arbitrage plays - were not off the mark.
Spare a thought then for the country's industry when the WTI itself hit negative prices on April 20, 2020 with paper traders left dangling expiring May contracts they could not get rid of. The historically bizarre situation did not last long but Canadian oil and gas stocks like many of their global peers took an absolute pummeling.
Canadian valuation declines have been particularly deep because of long-standing issues over moving crude cargoes to lucrative East Asian markets from the country's oil rich but landlocked province of Alberta via ports in British Columbia; with logistics and capacity issues taking painfully long to resolve.
Additionally, for Canadian oil sands producers – who either mine for crude bitumen or use in-situ recovery processes that inject steam and chemicals deep beneath the ground to separate the bitumen from the sand and pump it to the surface – break-even price is much higher than their more conventional peers.
Nonetheless, some semblance of normalcy has since returned to the global market. With average expectations of $25 per barrel WCS prices for 2020, the tide in sentiment is turning. Furthermore, it is also not just about Western Canada and upstream, i.e. exploration and production (E&P) focused equities. There are midstream, i.e. pipeline and logistics, and downstream, i.e. refining and marketing opportunities to aim for. And don't forget the rating agencies' preferred oil and gas beast – integrated companies – who they rate higher in financial standing.
In my opinion, the following five Canadian oil and gas stocks offer the most compelling opportunities with a three to five-year investment horizon in mind:
1. Suncor Energy (TSE:SU): Best-in-class balance sheet
In many ways, Suncor Energy is the pick of the lot as it ticks all the right boxes. For many investors, the company offers the most solid bet on the Canadian oil patch. Even a cursory examination of its portfolio reveals promising integrated operations.
In the current trying times for the industry where cash conservation is crucial, Suncor holds CAD$2 billion ($1.45 billion) in cash, monetary equivalents and investments redeemable over the short-term. Its 0.43 debt-to-equity ratio is arguably a best-in-class performance when it comes to balance sheets among its peers. That level of stability is likely to remain in place even if there is another short-lived bout of negative oil prices.
Suncor's dividend looks safe enough and carries around a 7% yield. The company has the backing of Warren Buffett and Saudi Arabia's sovereign wealth fund – the Public Investment Fund (PIF) – with the latter being its 14th-largest shareholder carrying a holding of ~2% of the company.
Where's valuation at: The stock is currently trading at around CAD$24, down 43% since the start of the year; having already mounted a recovery from lows of CAD$14.
2. Canadian Natural Resources (TSE:CNQ): Solid natural gas footprint
On the integrated value chain front, Canadian Natural Resources is not all that impressive. But it more than makes up for that by being Canada's largest producer of natural gas with operations in the British sector of the North Sea, and offshore Côte d'Ivoire and Gabon to boot. Of course, the company's largest operation is the Horizon oil sands project north of Fort McMurray, Alberta.
Overall, it has a decent track record of delivery as well as a stellar cast of individual and institutional backers. Much was made of Norway's divestment in the company along with three of its peers, but Saudi Arabia's PIF appears to have stepped in to bag a 2.6% stake in the company, making it Canadian Natural Resources' eighth-largest shareholder.
As of March 31, 2020, the Company's financials suggest it had approximately CAD$5 billion of liquidity available. That's an increase of $116 million over Q4 2019 levels, including cash and cash equivalents of approximately $1.1 billion and committed bank credit facilities.
Its dividend yield is similar to Suncor's at the moment in the region of 7%. However, it has underperformed the market so far this year. Between in it and Suncor, the latter would be my pick. However at current price valuations, Canadian Natural Resources remains an attractive buy.
Where's valuation at: The stock is currently trading at around CAD$25, down 39% since the start of the year; having already mounted a recovery from lows of $9.80.
3. Imperial Oil (TSE:IMO): Big backer, cracking petrochemical holdings
Imperial Oil is well worthy of consideration at current prices with a diversified downstream leaning portfolio and Big Oil backing in the form of a majority stake held by ExxonMobil.
The current climate has delivered its over 2,000 service stations a near-term hit but its reputation as Canada's largest petroleum refiner, a key petrochemical producer and a national marketer with coast-to-coast supply and retail networks remains undiminished. The portfolio offers significant medium to long-term potential.
In fact, its refining and marketing end of the business held it in good stead during the oil price slump of 2015-16. Focusing on the here and now, Imperial ended the first quarter of 2020 with $1.4 billion in cash on hand, and strong liquidity despite wider industry carnage.
Dividend yield is again around 7% at the moment. All things considered, it appears relatively stable with its retail preposition on a solid footing. If anything, Imperial Oil appears to be a bargain at its current share price.
Where's valuation at: The stock is currently trading at around CAD$22 down by 36% since the start of the year; having already mounted a recovery from lows of CAD$10.27.
4. Parkland Fuel Corp. (TSE:PKI): Canada's downstream champion
If downstream only companies tickle your fancy, then Parkland Fuel Corp should firmly be on your 'stocks to watch' list. Its portfolio of fuel retail points has been growing from strength-to-strength culminating in its 2017 acquisition of Chevron's Canadian downstream fuel operations for $1.5 billion.
Included in the deal was a signature acquisition of the Burnaby Refinery in Burnaby, British Columbia. Parkland's fuel retail station count is above 2,600, including U.S. and Caribbean sales points with many metropolitan outlets also offering "all fuel" points including electric vehicle charging at selected locations.
The company's cash and cash equivalents plus unused credit facilities stood at CAD$908 million as of March 31, 2020. Its dividend yield is just above 3%, but Parkland's current "enhanced dividend reinvestment plan" allows shareholders to reinvest their cash dividends to purchase additional shares from treasury at a 5% per share discount to the average of the daily volume weighted average trading prices during the pricing period.
That said, in terms of buying opportunities at low prices in the coronavirus age, you might have missed the boat with this one given the strength of its stock price recovery.
Where's valuation at: The stock is currently trading at around CAD$38 down by 21% since the start of the year; having already mounted a recovery from lows of CAD$19.99.
5. Cenovus Energy Inc. (TSE:CVE) Troubled high quality business
Born out of Encana Coporation's split in 2009, Cenovus Energy has had a troubling start to 2020. The oil price decline has hit it particularly hard in the absence of cash piles many of its stronger E&P peers have. The company's net debt was approximately CAD$7.4 billion at the end of the first quarter, compared with net debt of about CAD$6.5 billion at the end of 2019.
It has taken major steps to ensure survival in the current downturn. Cenovus Energy has CAD$6.7 billion in credit facilities to support it through the crisis; a liquidity support level that is adequate as the oil price recovers. It is also slashing capital spending, has suspended its dividend and is rolling back salaries.
While its oil sands production has been reduced (by approximately 60,000 barrels per day), Cenovus Energy has the flexibility to ramp up production when market conditions improve. Overall, it could be a good speculative buy as the company will in all likelihood survive the crisis.
Where's valuation at: The stock is currently trading at around CAD$6 down by 55% since the start of the year; having already mounted a recovery from lows of CAD$2.06.
Away from these five, some other Canadian oil stocks worth examining would be:
Enbridge Inc (TSE:ENB): One the largest Canadian oil and gas players but its midstream make-up did not take as much of a knock to valuation to make it an attractive buy at current prices. Its reputational issues in the past also appear to be a turn-off for some but to offset that Enbridge is turning its attention to renewable energy. (Down 15% since start of the year)
Husky Energy (TSE:HSE): Among worst hit Canadian oil and gas brands and might be taken private by its majority billionaire owner Sir Li Ka-Shing. (Down 62% since start of the year)
TC Energy Corp. (TSE:TRP): Solid energy infrastructure offering from natural gas pipelines to power plants. It remains a compelling long-term bet but is not cheap as relatively little or no shine has been lost in the coronavirus downturn. (Down 11% since start of the year)
Gibson Energy (TSE:GEI): Attractive storage and terminal portfolio to compliment its integrated service provision. (Down 19% since start of the year)
Pembina Pipeline Corp. (TSE: PPL): Solid midstream company with a compelling natural gas processing and transportation business model in Western Canada. (Down 28% since start of the year)
Disclaimer: Oil and gas markets, and the businesses operating within it, can be highly volatile so opinions in the sector may change instantaneously and without notice. The above commentary is meant to stimulate discussion based on the author’s opinion and analysis. It is not solicitation, recommendation or investment advice to trade oil and gas stocks, futures, options or products. The author received no compensation from the aforementioned companies for commentary on their stock price and business. All valuations in CAD$ unless specified, noted at close of trading on May 28, 2020.