Canadian Energy Stocks to Buy Now

After the oil price plummet, you may be looking to invest in the top Canadian energy stocks. Thinking of Suncor Energy Inc. (TSX:SU)(NYSE:SU), Enbridge Inc (TSX:ENB)(NYSE:ENB), or Inter Pipeline Ltd (TSX:IPL)? Well, among these, other common integrated oil & gas companies and midstream companies will be discussed.

Integrated oil & gas companies and the pipelines are the safer energy companies. Canadian energy stocks such as Suncor Energy Inc. (TSX:SU)(NYSE:SU) are integrated oil & gas that are involved with upstream and downstream operations. Because their businesses are multifaceted, their businesses are more stable than energy companies involved only in upstream businesses. Upstream operations include oil & gas exploration and production, while downstream operations include refinement, marketing, and distribution of the commodities.

The pipeline businesses generate stable cash flows by transporting and storing energy. Their services are mostly fee-based so their profitability are less affected by the oil price.

I put together a list of Canadian energy stocks that are integrated oil & gas companies or pipeline companies. They all turn out to be dividend stocks which help with portfolio returns because shareholders receive income even in a down market.


However, integrated oil & gas company dividends may not be reliable because the company profitability is based on the commodity prices. As we’ve seen in the past year, some energy companies had to slash their dividends. Cenovus Energy Inc (TSX:CVE)(NYSE:CVE) was one of them.

For the data analysis, I compared the energy stocks’ trailing twelve month (TTM) earnings per share (EPS) and operating cash flows from 2014’s. I’m also comparing the latest quarter’s debt-to-equity (D/E) to 2014’s. I will also include the D/E ratio. The above is checking the stocks’ profitability and debt levels in this low oil price environment.

The integrated oil and gas stock list includes Suncor Energy, Imperial Oil Limited (TSX:IMO)(NYSE:IMO), Husky Energy Inc. (TSX:HSE), and Cenovus Energy.

The oil and gas midstream list includes Enbridge Inc (TSX:ENB)(NYSE:ENB), TransCanada Corporation (TSX:TRP)(NYSE:TRP), Pembina Pipeline Corp (TSX:PPL)(NYSE:PBA), Inter Pipeline Ltd (TSX:IPL), and Keyera Corp (TSX:KEY).

Without further ado, let’s explore the integrated oil & gas Canadian energy stocks to see which one you should buy.

Which Integrated Oil and Gas Company Should You Buy?

Referring to Table 1 further down the page, Suncor Energy’s D/E increased 7% while its operating cash flow dropped by only 15%. Compared to its peers, it’s doing quite well. At the same time, its operating margin remains the highest among its peers.

It’s more reassuring to hold Suncor shares because it has a track record of increasing dividends. It has hiked dividends for 13 consecutive years. Further digging, and it turns out Suncor Energy is keeping operating cost low.In the first half of 2015, its operating cost per barrel was only $28.20. The oil price has remained above that, so that’s how the company remains profitable in this low oil price environment. Suncor Energy’s 5-year compounded annual growth rate for its dividend is over 20%, although its most recent dividend increase was only 3.6% to reflect the impact of the low oil price.

Imperial Oil is also a possible Canadian energy stock to buy as it maintains a relatively high operating margin of 10.5%. Coincidentally, that percentage is close to its 2009 low levels of 10.3%. Imperial Oil has impressively increased dividends for 20 years, although its dividend growth rate has been around 6% per year. Even though it only yields 1.3%, after a pullback of over 23% from its 52-week high, it could still be a decent investment. Investors can view Imperial Oil as a very conservative energy stock. It is awarded the highest S&P credit rating of AAA.

The operating margins of both Husky and Cenovus has dropped to below 4%. Particularly, Cenovus’ D/E is much higher than the others. Cenovus slashed its dividend in September 2015 by 40%. It probably did it to maintain a strong balance sheet, but it was bad news to income investors.

So, if I were to buy only one integrated oil and gas company, I would probably go with Suncor Energy, although Imperial Oil is not a bad choice if you’re a conservative investor.

Winner: Suncor Energy (or Imperial Oil for the more conservative investors)

Integrated Oil and Gas Stocks: Profitability and Debt Comparison

Company 1Market Cap 1Yield S&P Credit Ratings 2EPS change 2Op CFL change 2TTM Op Margin 3D/E Change 4D/E
Suncor $49.2B 3.4% A- -47.8% -15% 13.1% +6.7% 0.32
Imperial Oil $35.6B 1.3% AAA -43.1% -32.4% 10.5% +18.2% 0.26
Husky $20.9B 5.7% BBB+ -76.7% -12.8% 1.7% +22.7% 0.27
Cenovus $17B 3.1% BBB+ -186.7% -27.1% 3.5% -1.9% 0.53

Table 1: Integrated Oil and Gas Stocks Profitability and Debt Comparison
1 As of close of September 18, 2015
2 EPS change, Operating Cash Flow change, and Debt-to-Equity Change derived from Morningstar data on close of September 18, 2015
3 Latest quarter D/E compared to 2014’s
4 Latest quarter D/E

If you want to learn more about the energy industry and how it works, check out these books.


Which Pipeline Company Should You Buy?

Referring to Table 2 below, one maybe surprised by Enbridge’s huge slash in EPS and huge growth in operating cash flow. Rest assured that’s probably due to its dropdown of its assets to Enbridge Income Fund (TSX:ENF). This allows Enbridge to fund growth projects and to increase cash flows that help support Enbridge’s dividend growth of 8-11% until 2018. So, it’s not fair to compare Enbridge’s EPS and operating cash flow numbers to its peers.

Both Enbridge and TransCanada has consistently increased dividends for over a decade. Enbridge has increased dividends for 19 years in a row, and TransCanada has increased dividends for 14 years in a row. If you’re looking for consistent dividend growth, they’re your best bet.

Pembina Pipeline is a pure-play in energy infrastructure with assets across Canada and North Dakota. The Canadian energy company is committed to a low-risk business model with increasing EBITDA coming from fee-for-service contracts. Specifically, 64% of EBITDA came from fee-for-service contracts in 2014. In 2015, an estimation of 75% of EBITDA will come from fee-for-service contracts. For 2018, Pembina is aiming for 80-85% of EBITDA coming from fee-for-service contracts. Pembina Pipeline hasn’t cut dividends since 2005, and has increased it for 3 years in a row.

Inter Pipeline hasn’t cut its dividend since 1999, and it has increased it for 6 years in a row. At the end of Q2 2015, its payout ratio remained sustainable around 76%. The company is also committed to maintaining its investment grade credit ratings. Currently, its S&P credit rating is BBB+.

Keyera hasn’t cut its dividend since started paying it in 2003. It has a 4-year history of increasing dividends. In its September 2015 presentation, it indicates that its year-to-date payout ratio is 49%, indicating its dividend is sustainable. In fact, its dividend had such a great margin of safety that it was increased at an annualized rate of 15.7% in August 2015.

Since midstream companies put an emphasis on cash flows instead of earnings per share, Enbridge and Keyera seem to be the most promising. At the same time, Enbridge has the highest D/E which may scare off some investors. However, it seems to consistently spur growth.

Enbridge and TransCanada Price Chart Comparison

Source: Google Finance on September 18, 2015 close

Looking at the graph above, comparing the biggest 2 pipeline companies of Enbridge and TransCanada, you can easily see Enbridge’s growth reflecting in its share price. In a decade, Enbridge’s share price appreciated 176% while TransCanada’s share price appreciated by 32%.

Picking a winner from the pipeline companies is more difficult than picking the winner for the integrated companies. Rather, it depends whether investors want more growth or income to begin with.

For example, investors can choose the largest pipeline companies, Enbridge and TransCanada. Enbridge is planned for higher growth but has higher debt levels, while TransCanada is more conservative. Investors can also choose a smaller pipeline from the list to complement a large pipeline holding. Inter Pipeline and Keyera both look promising comparing their numbers in the table below.

Winner: Enbridge, TransCanada, Inter Pipeline, Keyera (???)

Pipeline Stocks: Profitability and Debt Comparison

Company 1Market Cap 1Yield S&P Credit Ratings 2EPS change 2Op CFL change 3D/E Change 4D/E
Enbridge $43.8B 3.6% BBB+ -82.5% +67.3% -1% 3.22
TransCanada $31.2B 4.7% A- -1.6% -5.4% +11.2% 1.59
Pembina $11.5B 5.4% BBB -10.4% -10.9% +23% 0.64
Inter Pipeline $8.5B 5.8% BBB+ +2% +7% +2.4% 1.26
Keyera $6.4B 4% N/A -22.1% +38.4% +7.4% 1.01

Table 2: Pipeline Stocks: Profitability and Debt Comparison
1 As of close of September 18, 2015
2 EPS change, Operating Cash Flow change, and Debt-to-Equity Change derived from Morningstar data on close of September 18, 2015
3 Latest quarter D/E compared to 2014’s
4 Latest quarter D/E

In Conclusion

From the integrated oil & gas stocks, I’ve picked Suncor Energy as the winner. It has low cost of operations, high operating margins, as well as a culture to increase dividends. From the pipeline stocks, it depends if you’re a conservative or more aggressive investor. For a large pipeline, TransCanada is the conservative pick and Enbridge is the aggressive pick for higher growth. The smaller pipelines of Inter Pipeline and Keyera also show growth potential.

Don’t get me wrong though. I don’t mean you should put your life savings into these Canadian energy stocks to bet that they’ll rise in the coming year. Rather, I’m an advocate of dollar-cost averaging into quality companies over time. Simultaneously, it’s essential to maintain a diversified portfolio of stocks that aren’t correlated to each other as much as possible. It also helps to understand that stocks from different industries behave differently.

It could take several years for energy demand to catch up to the excess oil supply. So maybe every quarter or so, investors could opt to add money in this space if they believe in the long-term demand of oil.

  • Are you adding to any Canadian energy stocks today?
  • Or are you still patiently waiting for the right entry point?
  • If you are, buying, I’m curious what you are looking to buy.
  • If you’re waiting, I’m curious to know what indicators or prerequisites you’re waiting for.

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Disclosure: At the time of writing, I am long SU, CVE, ENB, TRP, and IPL.

Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.

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3 thoughts on “Canadian Energy Stocks to Buy Now

  1. Bernie

    Are you sure you haven’t reversed the credit ratings between Enbridge and TCPL? I was lead to believe ENB has a credit rating of A- and TRP’s is BBB+. Can you confirm please.

    Nice numbers for Suncor. It would be interesting to compare SU to international companies like XOM, CVX, COP, RDS.B and BP? That said I think we haven’t seen the worst yet in world oil.

  2. Passive Income Earner Post author

    Bernie,

    ENB was downgraded from A- to BBB+ on Jun 19, 2015 due to their assessment of weak forecast financial metrics. TRP’s credit rating is A-, and the S&P site states the last update was on Sep 30, 2009.

    I plan to compare the majors listed on the NYSE. Maybe I’ll throw SU in there for comparison.

  3. Passive Income Earner Post author

    Hi Bernie, I’ve written an article comparing the big oil & gas integrated companies listed on the NYSE and Suncor, as well as the pipeline companies listed on the NYSE. You can read a summary here: http://www.passive-income-earner.com/top-u-s-energy-stocks-to-buy-in-2016-start-earning-dividends/ or read the full article on Seeking Alpha here: http://seekingalpha.com/article/3531106-wishing-i-could-restart-my-energy-portfolio-with-these-dividend-stocks

    For Canadians, I believe we get 35% withholding tax on US MLPs whether held in a RRSP or not, so the big MLP distributions don’t benefit us.

Comments are closed.