In August of 2020 we asked if Canada’s energy dividends were in trouble? Of course that was before energy prices and energy stocks were dominating the headlines. At the time Canadian oil prices were about $30 a barrel and energy dividends were under a lot of pressure due to collapsed earnings. 

Today, that price has more than doubled and it is eyeing that $70 range. You’ll notice when you compare the Western Canadian Select price to Brent (closer to $80) just how much Canada’s energy dividends and earnings would benefit from not having to discount relative to world price!

canadian oil stock graph
Source: Bloomberg Canada

he West Texas oil price is currently near $78 while Brent (Global) is above $80. 

Of course those higher oil prices are wonderful for Canadian oil producers, mostly operating or active in the Canadian oil sands, but many of the producers also have global operations. They have already become free cash flow gushers. And the stock market is starting to take notice. 

Over the last year, the returns for the TSX Capped Energy Index is more than 125%. 

canadian energy etf graph
Source: Google

On my site, I had suggested last October that investors consider Canadian oil producers. 

I offered … 

“The Canadian energy sector has been beaten up. Foreign investors have given up and so have many Canadian investors. Where there is incredible pessimism there can be incredible rewards. But there is certainly no guarantee that the pessimism for the Canadian energy patch is not deserved. That said, it is also certainly possible that the pessimism has jumped the shark. There may be incredible value in the energy sector for Canadian investors.”

Canadian investors who went against the flow were rewarded handsomely, and it was not as big a risk as many would think. The macroeconomic and energy-specific story was quite simple. 

Economic activity and energy usage was certain to pick up as we made our way through the pandemic. Canadian energy producers were made more lean and mean by the tough years in the energy patch. They had already spent the required amounts (CAPEX investments) to make their oil projects viable and profitable at lower oil prices. If prices do get to $50 a barrel and more, they have a license to print money.

Canada’s Largest Energy Stocks Comparison

Ticker

Company

Price

Market Cap

P/E

Dividend Yield

EPS

ENB

Enbridge

51.00

103B

17.02

6.61%

3.00

TRP

TC Energy

48.30

47.5B

29.84

5.62%

1.63

CNQ

Canadian Natural Resources

48.27

57B

14.01

3.83%

3.44

Su

Suncor

21.56

32B

27.33

3.00%

0.79

IMO

Imperial Oil

41.06

29B

N/A

2.35%

-0.53

CVE

Cenovus Energy

10.57

21.3B

302

0.53%

0.04

PPL

Pembina Pipeline

40.01

22B

N/A

6.27%

-0.87

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As you can tell from the chart above, if you’re a risk averse dividend investor, Canada’s pipeline’s are a much more stable bet (although potentially with much less of an upside) over the medium- and long-term.

Personally, I was convinced of the value of Canada’s pipelines by the private newsletter that I subscribe to called Dividend Stocks Rock. Mike Heroux – the man behind DSR – is a CFA and has been studying Canada’s dividend players for several decades. His free webinars on the value of the mid-stream pipeline companies (they’re not building any more of them) versus the mercurial nature of the oil companies themselves really made sense to me.

The Energy Stocks Reality – And Long Term Strength of Energy Dividends

The story on energy stocks has evolved, in that our green desires do not match the energy reality. Today there are reasonable fears of an energy crunch that could turn into an energy crisis.

The green energy transition will take a decade or two. In the meantime we have increasing demand for oil and gas and greatly decreased CAPEX – there’s little desire to look for more oil and gas. In fact, it’s politically unfashionable to suggest that we need more oil and gas, or to spend the time and money necessary to find and produce more oil and gas. 

That sets up a secular and positive trend for traditional oil and gas. It is an unfortunate reality. 

The story goes back to the most basic economic principle – supply and demand. 

On the bullish side, Eric Nuttall, portfolio manager at NinePoint Partners suggests it is a generational investment opportunity. Eric often reminds us that the free cash flow that many of these companies produce is beyond generous, it is ridiculous. They can quickly pay down debt, buy back shares and return more value to shareholders by way of generous dividend increases. 

For the record, year to date Nuttall’s energy fund has returned over 145%, iShares XEG is up about 65% into the first week of October. 

The Big Oil Stocks Idea

Looking at returns for Canada’s “Big 3” oil stocks over the last year have been eye-opening.  

Here is the portfolio income chart from that post, with a hypothetical starting amount of $10,000. It is an equal weight portfolio of The Big 3.

canada oil stocks portfolio
Source: Portfolio Visualizer

The big oil stock consideration was and is Canadian Natural Resources (CNQ), Suncor (SU) and Imperial Oil (IMO). In Million Dollar Journey’s post on the top Canadian Dividend Growth Stocks you’ll find ‘The Big 3’. 

In August of 2020 I noted that the dividends had held up reasonably well. 

  • Canadian Natural Resources (CNQ) had maintained its dividend and offered a yield of almost 6.3%. 
  • Imperial Oil (IMO) has maintained its dividend and at the time delivered a yield of almost 3.8%. 
  • After a dividend cut of 55% Suncor (SU) was down to a yield of 3.7%. 

But the free cash flow is now feeding sweet dividend increases, or should we say dividend gushers. 

  • In April CNQ increased its dividend by 10.6%. 
  • In July IMO increased its dividend by 22.6%

I have seen analyst reports that suggest Suncor will increase its dividend to its prior state within a year (or so). 

The oil and gas sector has the potential to be the greatest source of dividend growth within the Canadian market. Of course Canadian investors are also keeping an eye on Canadian bank stocks.

Regulators had forced the banks to suspend dividend increases and share buybacks during the pandemic. Those restrictions will likely soon be removed, many expect double digit dividend growth for Canadian banks and financials. 

What if You Had Invested In the Big 3 Oil Stocks?

From that time of that post you would have seen some generous and growing income (had you purchased or continued with The Big 3. That said, you would also have total returns that would have almost tripled the rate of return compared to the TSX Composite.

oil stocks portfolio growth graph
Source: Portfolio Visualizer

You’ll also see the pipelines in there. Those are my two pipe holdings, Enbridge (ENB) and TC Energy (TRP). You’ll find those companies in the portfolio that focuses on Canadian Wide Moat Stocks and are stellar Canadian dividend all stars.

Back in 2020, I had suggested that I would stick with being a toll taker, collecting tolls and dividends by way of those pipelines that move the oil and gas around North America. Of course, Enbridge and TC Energy are much more diversified and do have energy producing operations as well. 

But the energy producer story just became too overwhelming and obvious for me. While I was late to eat my own cooking, I started to build positions in the iShares XEG and more recently into Nuttall’s Ninepoint energy ETF.

We are enjoying some nice returns. But more important than the dividend and total return potential is the fact that we (my wife and family) are hedged against any energy crunch and crisis. 

Escalating prices at the pump are most likely not a risk (for us). In fact, we’ll likely have any energy costs covered with additional exceptional gains in the bank. And I certainly hope we do not run into an energy crisis.

My guess is that the greater theme of ongoing higher prices for oil and gas continue, and this may turn out to be a very solid and profitable portfolio bolt-on. It’s part of the explore within the core and explore portfolio approach. And again, I’d add the word hedge in concert with the explore notion. 

I would factor in the energy producer exposure with our other commodities allocation that includes gold, gold stocks and the larger baskets of commodities. 

I will not get side-swiped by inflation or stagflation

Bigger… Not Better

While investing in The Big 3 was a very solid strategy, it underperformed the index and that Ninepoint fund. There is more torque in many of the smaller companies and especially in the mid-to small-cap names. 

You might consider those funds. If you’re a stock selector and like the idea of energy exposure you might research some of the names that you find in those funds and any small cap lists. 

While there have been some quick gains for the sub sector, it is still early days if the longer term thesis holds out. And of course this is a volatile sector and the risks are also generous. OPEC could turn on the taps and flood the market with oil. Though this week they stuck to the plan of a modest increase of 400,000 barrels a day for the month of November. 

Many of the calls these days are for oil in the $80-$100 range at some point in 2022. 

Of course, that stable or increased demand depends on continued economic strength and recovery. That is not a given. 

I’m happy to hedge and accept those risks with 5% of my allocation – as I enjoy taking my tolls and collecting those healthy energy dividends.

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Dale Roberts

Dale Roberts is the owner operator of the Cut The Crap Investing blog. He also writes a weekly column for MoneySense.
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