So far, 2022 has been a great year to own stocks in the energy sector, and an even better year for shareholders of some of Canada's top oil companies. Canadian Natural Resources (CNQ 0.56%), Cenovus Energy (CVE 0.24%), and Suncor Energy (SU 0.43%) are up 42%, 46%, and 40% year to date, respectively.
But the best may be yet to come. There is still plenty of potential upside ahead for their shareholders as oil prices remain far above what it costs these companies to extract it. The stocks look cheap even after outstanding recent performances. They're also paying out solid dividends and increasing them. All three should be on the watch lists of dividend investors and investors in general.
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Canadian Natural Resources
Canadian Natural Resources, the largest company of the three, is firing on all cylinders. It has boosted its dividend payout by 76% since 2020, increased its production of natural gas and crude oil in 2021, and projects further increases this year.
Though its share price has more than doubled in the past year, the stock is still inexpensively valued, trading at just 12 times trailing earnings and 7 times forward earnings. Canadian Natural also boasts the highest dividend yield of this group -- 3.9% at current share prices. Management boosted the payout by 28% last quarter and could increase it again in conjunction with its May 5 earnings release.
In addition, Canadian Natural also has a large share repurchase program in place: It's authorized to buy back up to 102 million shares, about 10% of the shares outstanding. Like Suncor and Cenovus, Canadian Natural has large holdings in Alberta's oil sands, which have the advantages of low costs for extraction, long reserve lives, and low decline rates.
Cenovus Energy
Cenovus Energy is another compelling oil stock. The management team has intelligently used its increased profits from higher oil prices to pay down debt, buy back shares at what management sees as an undervalued level, and triple its dividend payout.
The company has plenty of room to grow its payout even further. Rather than raising the dividend all at once, CEO Alex Pourbaix is taking a prudent and flexible approach. The company plans to keep retiring debt, and will return the remaining 50% of its free cash flow to shareholders via share buybacks when the stock is below its intrinsic value at $60 oil, and then pay out the remainder via special dividends. Even better, after it cuts its debt to $4 billion, Pourbaix says the company will return 100% of excess cash to shareholders via the same structure.
Cenovus is a compelling shareholder return story run by a smart management team that has the potential to significantly reward shareholders over the next few years with both share buybacks and special dividends.
Suncor Energy
Suncor Energy recently made headlines when activist investment firm Elliott Management said it had taken a stake in the company, and that it was seeking shareholder-friendly changes such as increasing returns to shareholders and appointing new independent directors.
Suncor is in a strong position because its breakeven cost on oil is about $30 a barrel. When accounting for its dividend, which at current share prices yields 3.7%, Suncor's breakeven cost per barrel is just $35. While oil from Canada's oil sands does not fetch the same price as the West Texas Intermediate or Brent prices commonly quoted when the media refers to oil prices, the price for Western Canada Select, which is what many of these producers receive per barrel, averaged $94.57 a barrel in March 2022. which is well above the breakeven price.
That cash could be used to ramp up share buybacks or for higher dividends -- exactly what Elliott Management is pushing for. Even if oil prices fall, Suncor would still be in a comfortable position. With its low breakeven cost giving the company and shareholders a margin of safety, an already-solid dividend payout, and a high-profile activist investor looking to keep the company on its toes and increase shareholder returns, Suncor looks like a solid investment.
In conclusion, Suncor, Cenovus, and Canadian Natural Resources all look like they would make strong additions to income portfolios. All have advantageous assets in Canada's oil sands and are using their excess profits from today's high oil prices to reward shareholders. The potential for oil prices to stay at levels comfortably above their breakeven costs means that these returns to shareholders are likely to increase even further over time.
