A recent survey of stock analysts’ reports featured three Canadian energy sector stocks, all in the oil and gas industry, to buy.
Suncor Energy Inc. (TSX—SU; NYSE—SU)
As noted in its first-quarter report, oil and gas stock Suncor generated its highest quarterly adjusted funds from operations in its history of $4.1 billion, or $2.86 a share. That’s about double the $2.1 billion, or $1.39 a share, the company reported in last year’s first quarter.
Operating earnings rose 269 per cent to $2.8 billion, primarily due to significantly higher crude oil and refined product realizations, reflecting the improved business environment for oil and gas stocks.
To top it off, Suncor approved a 12-per-cent increase in its quarterly dividend to a high of $0.47 a share, the highest quarterly dividend per share in its history.
The markets seemed happy with these results, as Suncor’s stock outperformed the overall market in the days following the earnings release.
Indeed, the shares got a greater boost in late April when US hedge fund manager Elliott Investment Management said it wants to see a shakeup of Suncor’s board of directors and a strategic and management review of its operations. Elliott had complained that the company has underperformed its peers in recent years.
With just a 3.4-per-cent stake in Suncor, it’s difficult to see how Elliott’s views will prevail. But the firm’s activism could still result in improved performance at Suncor, particularly in the area of safety after an accidental death of a worker in January.
Yet, despite the relative strength in Suncor’s shares, the stock is still quite cheap. It trades at about 4.3 times its estimated 2022 cash flow and its dividend of $1.88 a share yields 3.7 per cent. Suncor is a Buy.
Imperial Oil Limited (TSX—IMO; NASDAQ—IMO)
Integrated oil and gas stock Imperial Oil reported record financial results for the first quarter as pandemic restrictions were lifted and commodity prices further strengthened. Upstream production of 380,000 gross oil-equivalent barrels per day, however, was down 12.0 per cent from the same quarter last year, as operations were impacted by extreme cold weather and unplanned downtime at the Kearl oil sands mine in the Athabasca region of Alberta.
As an integrated oil and gas company, Imperial Oil explores for, produces, refines and markets oil and natural gas products. The company has upstream operations in Alberta and the Northwest Territories, refining in Alberta and Ontario, 21 terminals across the country and more than 2,000 Esso and Mobil stations.
For the three months ended March 31, 2021, Imperial made $1.2 billion, or $1.75 a share, compared with $392 million, or $0.53 a share, in the same period of 2020. The increase was primarily driven by strong market conditions.
Despite lower production, upstream income soared 890 per cent to $782 million, thanks to higher price realizations and higher royalties driven by improved commodity prices. Downstream income was $389 million, up 33 per cent, thanks to higher margins, primarily reflecting improved market conditions. But chemicals income dropped 16.4 per cent to $56 million, as margins eased from record highs.
Cash flow, meanwhile, rose 83 per cent to $1.9 billion, while free cash flow came in at $1.6 billion.
With strong margins across all its businesses, Imperial is well positioned to continue generating substantial free cash flow. We therefore look forward to further dividend increases and share buybacks. In the first quarter, the company raised its quarterly dividend nearly 26 per cent. And after buying back $449 million worth of its shares earlier in the first quarter, it now plans to initiate a substantial issuer bid, or buyback, returning up to $2.5 billion to shareholders.
The stock trades around 7.8 times the $8.78 a share that Imperial will likely earn in 2022. Its annual dividend of $1.36 a share yields about 2.0 per cent.
Tourmaline Oil Corp. (TSX—TOU)
Oil and gas stock Tourmaline Oil Corp. has proven itself to be “a force to be reckoned with,” says Desjardins Capital Markets analyst Chris MacCulloch. He says that over the last few years “TOU has transformed itself into one of the leading North American exploring-and-producing large cap gas companies with a near perfect portfolio.”
He notes that its core assets hold extensive drilling inventory with compelling economics; that it carries a strong balance sheet with an investment-grade credit rating, which provides capital flexibility and resilience through commodity price cycles; and that it maintains an opportunistic natural gas marketing portfolio, which provides significant exposure to premium-priced California markets, with JKM (Japan-Korea Market) price exposure on deck in 2023 through its LNG (liquefied natural gas) feed-gas supply agreement with Cheniere Energy Inc.
Mr. MacCulloch also notes that TOU’s five-year plan incorporates relatively modest capital spending, which maximizes discretionary FCF (free cash flow). Most importantly, its capital allocation prioritizes shareholder returns, as evidenced by its June 1 dividend increase and management’s commitment to providing future special dividends.
Tourmaline announced the results of its annual shareholder meeting and a 12.5 per cent increase in its quarterly base dividend to $0.225 a share (from $0.20), which will be payable on June 30, 2022. For context, TOU has now raised its base dividend six times since late 2020, resulting in an 87.5 per cent expansion of the quarterly payout, while also providing $3.50 a share in special dividends since the end of 2021.
The dividend increase comes on the back of strong first-quarter financial results, along with a formal commitment to provide additional special dividends through the balance of the year. The latter, the analyst says, should be enhanced following the continued improvement in commodity prices, particularly on the natural gas front.
Pleased with the income it generates for shareholders, Mr. MacCulloch maintains a buy recommendation for TOU.
This is an edited version of an article that was originally published for subscribers in the June 2022/Second Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.
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The MoneyLetter •8/4/22 •