In this series, we reviewed all of the TSX and TSX Venture’s stock and came up with what we think the best candidates are. In this article, we describe the list of the best energy stocks in Canada, as well as the methodology that got us there.
(Updated Jan 31, 2023) An energy sector stock is a share in the ownership of a company that produces or sells energy-related products and services.
The energy sector includes companies involved in the production, distribution, and sale of energy sources such as oil, gas, electricity, and renewable energy. Energy-related services include those involved in the exploration, extraction, processing, and transportation of energy sources.
Some of the largest companies in the energy sector are ExxonMobil, Chevron, PetroChina, and Royal Dutch Shell.
The Cyclicality Of Energy Stocks
The energy sector is cyclical in nature, and therefore, energy sector stocks can be volatile. Prices of energy commodities such as oil and gas fluctuate with changes in global demand and supply. Geopolitical factors can also affect the prices of energy commodities and, in turn, the stock prices of companies in the sector.
Due to the volatile nature of the sector, energy sector stocks are often considered to be high-risk investments. However, energy sector stocks can also offer high returns. For example, the share prices of oil and gas companies usually increase when there is an increase in the price of crude oil.
The energy sector is an important part of the global economy. Energy sector stocks can provide investors with exposure to this sector.
Methodology For Ranking The Top Energy Stocks In Canada
To come up with the list, we’ve first made sure that the company has a Return on Equity higher than 12%. This would be a decent standard for any company, and it’s also true of energy stocks.
We’ve also made sure that the companies on the list had consistent long term revenue growth. Positive earnings for the past two years were a must. We also aimed for companies with a market cap high enough ($1B). This is a rule of thumb to make sure that their claims of oil reserves and production capacity aren’t in doubt. This avoids having to do thorough due diligence of their oil reserves.
We’ve then sorted the top Canadian energy sector companies by free cash-flow yield. The best metric to differentiate a good from a bad investment, all else being equal, from the highest to the lowest:
- VET, with a PE ratio 3, 31% free cash-flow yield and a 1.5% dividend yield, Vermilion Energy Inc. seems to be the comeback story in the sector. Having already increased 6-fold past their 2020 bottom, it seems like the stock still is extremely cheap, and far from their 2014 highs. This one makes the top of the list.
- BIR, with an ideal PE ratio of 3, 26% free cash-flow yield and a dividend yield of 9%, Birchcliff Energy Ltd. seems like the second best energy stock in Canada right now;
- ARX, with a PE ratio of 5, 22% free cash-flow yield and 3.9% dividend yield, ARC Resources Ltd. comes third on the compelling energy sector opportunity list;
- MEG, with a PE ratio of 7, 19% free cash-flow yield and no dividends, MEG Energy Corp. seems compelling, but it is worth noting that their management has diluted the company more than their peers over the last few years. They’ve done that by issuing new shares, whereas most other candidates on this list did the opposite – buying back shares. MEG increased 19% since we wrote about it, so it now falls off the best energy stocks podium;
- IMO, the highest integrator in this list, with a PE ratio of 7, 18% free cash-flow yield and a 2.2% dividend yield, Imperial Oil is well diversified against short term volatility of oil prices. It has the fifth best FCF yield in the sector;
- CNQ, with a PE ratio of 8, 16% free cash-flow yield and 4.2% dividend yield, Canadian Natural Resources Limited comes sixth on the Top Energy Stocks list as it increased in price by 11% since we last flagged it;
- CVE, with a PE ratio of 10, 14% free cash-flow yield and 1.8% dividend yield, Cenovus Energy Inc. comes last on the compelling energy sector opportunity list;
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