Are These Canadian Energy Stocks Worth Your Investment Dollar?

Canada has seen its crude oil and natural gas production steadily climb over the years. However, since 2011, Canadian energy companies have struggled -- some more than others. Here are three companies to consider and one to avoid.

Apr 21, 2014 at 11:11AM

For all of the energy produced and exported by Canada, energy stocks based there have not always performed well. With the U.S. producing progressively more of its own energy, can Canadian companies regain their profitability lost after 2011? Perhaps. Here are three companies to look at and one to avoid.

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In early 2011, many Canadian energy companies looked terrific. Production, earnings, and dividends all grew enviably. Then Americans got into hydraulic fracturing and horizontal drilling in a big way, and suddenly Canadian energy wasn't in demand like it was.

While production may have been maintained, earnings and dividends were another matter. Companies such as Enerplus (NYSE:ERF), Encana (NYSE:ECA), and Penn West Petroleum (NYSE:PWE) all had to dramatically cut their dividends, reduce drilling and administrative costs, and watch their stock prices drop. Even high-flying Suncor Energy (NYSE:SU) lost its luster as a hot stock.

Penn West exemplifies an energy investment gone bad. The company produces oil from its assets in western Canada. The oil it produces tends to be lighter grade, competing directly with oil produced in the Bakken. Unlike the Bakken, Penn West's Cardium and Viking plays don't have excess rail or pipeline capacity to get the oil to market. The company saw its earnings drop, necessitating a dividend cut.

In 2012, a new director took over and began reshaping the company. Administrative expenses were reduced. Drilling and production activities were focused on the most promising plays. For all of that effort, the company lost money for fiscal year 2013 and its quarterly dividend declined from $0.258 a share to $0.127 a share. Not surprisingly, the company's stock went from a high of $12.77 per share in late July 2013 to about $9.20 per share today. The company still has its work cut out for it.

While not on the same scale, Suncor and Encana have also suffered their lumps.

Encana fell from around $34 a share in early 2011 to about $23 a share today. In fairness, the company's stock started 2014 at about $17.50 a share and has steadily climbed since. Encana continues its strategy of shifting away from natural gas production to natural gas liquids and oil. As an example, the company recently sold its natural gas assets in Wyoming to focus on five other plays, mostly in Canada. The fourth quarter of 2013 saw increased administrative expenses due to reorganization. Despite this, investors seem to like what they see in Encana's long-term strategy.

Suncor peaked at over $47 per share in 2011 and currently trades around $36 per share. Its net earnings have rebounded from $1.77 per share in 2012 to $2.61 per share in 2013. Suncor's bitumen production from oil sands is in demand by U.S. Gulf Coast refineries. With improved takeaway projects set for completion in the next six months to five years, more of its bitumen should reach refiners and earnings should continue growing.

One company's stock that stands out is Enerplus. This company has suffered its share of dividend cuts over the past three years, but its stock has steadily grown from just under $13 a share per year ago to almost $22 per share today. One important feature of the company is that its production is roughly evenly split between the U.S. and Canada. In fact, Enerplus' U.S. assets include some of the most prolific oil and natural gas plays in the country.

Specifically, Enerplus has assets in the Bakken and Marcellus, giving it not only great locations for production but takeaway capacity, too. Unlike Canada, where pipelines and railroads are slowly catching up with production, the Bakken has an excess of pipeline and rail capacity. The Marcellus has some bottlenecks, but multiple pipeline projects that are under construction should minimize these problems.

Final Foolish thoughts
Of the companies presented here, Enerplus seems the best suited for short-term growth. While its Canadian counterparts face bottlenecks getting their product to market, Enerplus can at least get its American energy production to market with minimal hassle and a better price. The company is not without risk, of course, as its earnings currently don't cover its dividend payments. However, the company seems intent on reducing its drilling and administrative costs and increasing its U.S. production. This should reward investors in the future.

Suncor would be the long-term investment of the lot. At its current production rates, the company's oil sands hold 35 years' worth of production. Additionally, its Fort Hills asset holds an estimated 50 years of production and is just waiting for a joint venture with Total to begin. As takeaway capacity grows, this heavy oil/bitumen should find a ready market on the U.S. Gulf Coast. All of this offers patient investors significant oil inventory that will likely flow for years if not decades.

Penn West could turn itself around, and it's certainly trying. For my risk tolerance, I'd wait until I see clearer evidence that the turnaround is actually producing profits before investing.

3 stock picks to ride North America's energy bonanza
Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a look at three energy companies using a small IRS "loophole" to help line investor pockets. Learn this strategy, and the energy companies taking advantage, in our special report "The IRS Is Daring You To Make This Energy Investment." Don’t miss out on this timely opportunity; click here to access your report -- it’s absolutely free. 

Robert Zimmerman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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