Here are two energy stocks to buy for growth and income. Both are integrated oil and gas stocks. By market cap, they are the first (Suncor) and third (Imperial) largest Canadian petroleum companies.
Imperial Oil Ltd. (TSX—IMO) has benefited from a strong downstream financial and operating performance, and delivering on its upstream production commitments. In 2018, the company’s downstream business earned more than $2.3 billion, a best-ever result excluding 2016, which reflected significant gains from asset sales. Meanwhile, its upstream business achieved oil-equivalent production of 383,000 barrels per day (b/d) in 2018, up 2.1 per cent from 375,000 b/d in 2017.
Imperial Oil, 69.6-per-cent owned by Exxon Mobil, is one of Canada’s largest integrated oil companies.
For the three months ended Dec. 31, 2018, Imperial made $2.3 billion, or $2.86 a share, compared with $1.8 billion, or $0.58 a share, in 2017. The 2017 results included upstream non-cash impairment charges of $566 million.
Upstream losses significantly pared
Upstream recorded a loss of $138 million in 2018, compared to a loss of $706 million in 2017. The improvement reflected the absence of the impairment charges noted above, higher volumes from the Kearl oil sands deposit in Alberta, lower royalties and favourable foreign exchange.
Downstream income jumped 78 per cent to $2.4 billion, thanks mostly to stronger margins.
Given oil price volatility and recent actions by the government of Alberta to intervene in the oil market, the industry outlook over the near term is uncertain. But Imperial’s high-quality assets and integrated model position it better than other oil companies to compete in such an environment.
This oil and gas stock trades at just 13.8 times the $2.58 a share it will probably earn in 2019. Its annual dividend of $0.76 a share yields 2.1 per cent.
Imperial Oil is a buy for growth and some income.
Lower crude prices boosted refinery margins
Suncor Energy Inc.’s (TSX—SU) downstream business has helped reduce the impact of volatile crude oil prices on the company’s upstream business. A widening differential between Canadian crude oil prices and world benchmark prices negatively affected upstream results. But lower prices for Canadian crude had a positive impact on the company’s downstream refining businesses, as they benefited from lower feedstock costs which, in turn, boosted refinery margins.
Suncor Energy is Canada’s largest integrated energy company by market capitalization. The company’s upstream operations include oil sands development and upgrading, and offshore oil and gas production. Its downstream operations include petroleum refining and product marketing under the Petro-Canada brand.
Q4 earnings declined
While the company’s downstream businesses helped offset some of the impact of volatile crude oil prices, they were unable to prevent earnings from declining in the fourth quarter. For the three months ended Dec. 31, 2018, Suncor’s operating earnings were $580 million, or $0.36 a share, compared with $1.3 billion, or $0.79 a share, in the same period of 2017.
The oil sands segment lost $393 million in the quarter, down from an operating profit of $615 million the previous year. Exploration production profit fell to $103 million from $231 million. Refining and marketing profit was $723 million, down a more subdued 3.0 per cent due to an inventory loss associated with lower crude prices and refined product benchmarks.
Cash for buybacks and higher dividends
The good news is Suncor ended the quarter with $286 million in free cash flow after capital expenditures and dividend payments. Among the uses the company has put this money toward are share buybacks and a dividend increase. Management expects to complete its current $3-billion buyback program by the end of this month. And it has approved an additional buyback program of $2 billion. Suncor has also recently increased its quarterly common share dividend 17 per cent to $0.42 a share.
Suncor trades around a reasonable 15.9 times the $2.83 a share it should earn in 2018. Its annual dividend of $1.68 a share yields 3.7 per cent.
Suncor is a buy for growth and income.
This is an edited version of an article that was originally published for subscribers in the March 1, 2019, issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.
Money Reporter, MPL Communications Inc.
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Money Reporter •4/9/19 •