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2 Huge Canadian Energy Stocks to Buy at Bargain Prices (SU CNQ)

Rough times in the energy sector have paved the way for two Canadian stocks to play for the long-term

It’s no secret that the last year or so hasn’t been very kind to energy stocks. The glut of crude oil and natural gas has clipped much of the excitement and share price appreciation from the sector.

2 Huge Canadian Energy Stocks to Buy at Bargain Prices

Everyone from oil service firms to the largest integrated major has felt the sting of lower oil prices. But do you know who has felt it the worse?

Our neighbors to the north.

Canadian energy stocks have suffered even more than those in the U.S. as the glut has reduced prices for Canadian and oil sands produced crude oil.

But in that suffering, there’s some huge bargains beginning to take shape. For long-term investors, the discount in Canadian energy stocks is too good to pass up.

Big Declines in Canadian Energy Stocks

For Canada’s energy stocks, the price drop in crude hasn’t been well received at all.

Like U.S. benchmark West Texas Intermediate, Canada’s standard Western Canadian Select has also plunged in price as the various supply and demand imbalances have taken hold. The problem is that WCS — thanks to transportation bottlenecks and other issues — often trades at discounts to WTI. So when WTI kept making new lows, WCS was even further down.

At one point, Western Canadian Select crude prices touched $14 per barrel.

Under that pricing scenario, it’s easy to see why investors would abandon Canadian energy stocks. And abandon them, they did.

The S&P/TSX Capped Energy Index sank nearly 28% last year. When taking into account currency fluctuations and the falling Loonie, that lost grows more than 36%. Investors do have the right to be concerned. That low $14 price per barrel, as well as the $2.28 price for natural gas, has hit the nation’s energy stocks right in the wallet.

Like many producers in the U.S., there are plenty of Canadian energy stocks that have also taken on too much debt in an effort to keep drilling. And like many U.S. producers, the bankruptcy risk continues to grow.

For example, former Canroy darling Penn West Petroleum Ltd (USA) (PWE) recently announced that it should breach debt covenants under the weight of its debt and low oil prices.

In response to the low-price environment, many Canadian energy stocks have cut dividends, reduced headcount by thousands and slashed capital expenditure spending by the largest decline in nearly 70 years.

While the situation may seem hopeless, it’s not as bad as it seems. Not every producer in Canada is going to be like PWE or Pengrowth Energy Corp (USA) (PGH), which are suffering under the weight of their debt and going the way of the dodo.

In fact, some are actually thriving in the downturn. And with crude oil prices on the mend, you’re looking at much better earnings coming down the pike for the Canadian energy stocks actually surviving.

Meanwhile, Canadian energy stocks are trading for big discounts to their U.S. peers. According to Macquarie Research, enterprise value to debt-adjusted cash flows when looking at oil and gas futures strip prices for U.S. oil stocks is 13.6x. Canadian energy stocks only clock in at 12.1x. Looking out to next year, U.S. energy stocks can be had for 12.9x, but Canadian ones can be had for just 11x.

For long-term investors, Canada’s energy producers are on even more of a sale than U.S. ones — especially considering that crude oil has already bottomed and moved higher.

Two Canadian Energy Stocks to Buy

With Canadian energy stocks on a big-time sale, investors may want to snag some of the better values for the long-term. Both Suncor Energy Inc. (USA) (SU) and Canadian Natural Resource Ltd (USA) (CNQ) are the best names that come to mind.

Refining has saved the day for many of the integrated majors here in the U.S., but the effect has been even more dramatic for Suncor. The key is SU’s four refineries. SU owns some of the largest acreage in the oil sands. The firm basically created the process to commercially tap Alberta’s rich oil wealth back in the 1960’s.

That production is tied to WCS prices, and it has been able to feast on that huge difference in order to clip some huge margins converting that oil to gasoline and other products. Those huge crack spreads continue to result in robust cash flows from these operations. Robust enough to go shopping for weaker rivals in the downturn and still pay a 3% dividend yield.

Ultimately, SU isn’t just surviving the downturn, but thriving in it.

The same can be said for Canadian Natural Resources. The firm has been quite nimble at adding “hated” assets during downturns. That had it buying oil acreage when natural gas was hitting $15. Now it’s starting to see the fruits of that buy.

The firm’s Horizon oil sands project has begun producing and two expansion projects will generate $675 million in free cash flow in 2017 before rising to nearly $1.6 billion in 2018.

Like SU, CNQ has the balance-sheet strength to keep on truckin’ during the down-turn and add assets, expand on major projects and fund its 2.4% dividend without breaking a sweat.

The Bottom Line: Canadian energy stocks have been beaten-up worse than their American counterparts. In those price drops, bargains have emerged with SU and CNQ being two of the biggest.

 As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

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