Canada has the third-largest proven oil reserves globally, making up over 10% of the global reserves. It’s also the fourth-largest oil producer, right behind Russia.
Oil is a vital part of the Canadian economy, and the energy sector employs a sizeable portion of the total workforce.
It’s one of the second largest sectors on the TSX (by weight), right behind financials.
There are a lot of oil companies in the country and plenty of options when it comes to the best oil stocks in Canada.
Best Oil Stocks In Canada
Before we go through the list, here are some terminologies associated with oil companies that you should know:
- Upstream: Upstream energy or oil companies focus on oil discovery, extraction, and production.
- Midstream: Midstream companies primarily focus on the storage and transportation of crude oil, hydrocarbon liquids, gas, etc. This includes pipeline companies.
- Downstream: Downstream companies focus on the consumer end of oil and derivatives, i.e., refining, marketing, and distribution.
- Integrated: Integrated oil companies do it all, i.e., from extraction to refining and distribution.
There are various other kinds of oil companies as well, like companies that only focus on good drilling or industrial companies that cater specifically to oil/energy companies.
- Ticker: ENB.TO
- Forward Dividend Yield: 7.30%
- Dividend Payout Ratio: 293.86%
- Dividend Yield (12-Month Trailing): 7.58%
- Upcoming Dividend Date: Dec 01, 2023
- Market Cap: $98.99 Billion
- Forward P/E Ratio: 16.93
Enbridge is an energy giant and an industry leader in more ways than one. As the largest pipeline company in North America, the company is responsible for transporting roughly 30% of the oil produced in the region.
It also runs the largest natural gas operation in North America (though the consumer base is purely Canadian) by volume and has the largest market cap in the sector. Its magnitude, market penetration, and strong financial history make it the “bluest” blue chip among Canadian oil stocks.
The primary reason to fall in love with this oil stock is the dividends, which shine in three dimensions – Yield, resilience, and growth. The yield is typically quite juicy (at current writing it is over 7%), the company has sustained and grown its payouts through some of the worst financial crises (most recently COVID), and it has a stellar dividend growth history (28 years of consecutive growth in 2023).
These dividends are backed by strong revenues that have grown by almost 62% between 2013 and 2022, and the bulk of its growth stems from transportation and other services revenues, which rose from $4.6 billion to $18.5 billion in 2022.
The capital appreciation potential of the stock has been in question since the 2014 fall, and the current combination of a discounted price and overvaluation doesn’t generate hope for the near future.
But its dividends are solid, and the company’s heavy lean on natural gas (both transportation and utilities) and a rapidly growing renewables segment that already has over 5 GW capacity reflects management’s pragmatic vision for the future.
2. Canadian Natural Resources
- Ticker: CNQ.TO
- Forward Dividend Yield: 4.50%
- Dividend Payout Ratio: 38.19%
- Dividend Yield (12-Month Trailing): 3.97%
- Upcoming Dividend Date: Jan 05, 2024
- Market Cap: $97.08 Billion
- Forward P/E Ratio: 9.49
It’s natural to consider mid-stream pipeline stocks more stable compared to upstream stocks since its revenues are tied to long-term transportation contracts instead of oil prices that vary every day, but Canadian Natural Resources stands against this natural order.
It’s one of the largest upstream companies for both oil and natural gas in the world and has the largest proven reserves of any Canadian company – 5 billion Barrels of Oil Equivalents (BOEs) that include natural gas (second largest producer in Canada) and crude oil (largest crude oil producer in Canada).
Its reserves, world-class assets, product mix, low production cost (which leads to higher profitability), and debt, which is proportional to its market capitalization, are one of the lowest among Canadian oil producers, all leading to a stable company with a very stable stock.
It was one of the few companies that recovered from the 2014 crash before the post-COVID bull run. It’s currently close to its all-time high while being fairly valued. Its dividends, while not as attractive as Enbridge, are more financially stable (lower payout ratio) and have a similar dividend pedigree – 22 consecutive years of dividend growth.
In the seven years between 2016 and 2022 – the company has grown its revenues by about 4x while over the same period, expenses rose by 2.4x, boosting the profit margin. It’s a great example of efficient operations.
3. Pembina Pipeline
- Ticker: PPL.TO
- Forward Dividend Yield: 6.46%
- Dividend Payout Ratio: 52.29%
- Dividend Yield (12-Month Trailing): 5.86%
- Upcoming Dividend Date: Dec 29, 2023
- Market Cap: $24.72 Billion
- Forward P/E Ratio: 15.52
Pembina Pipeline is another pipeline stock on this list with a massive network – 18,000 kilometers, that helps the company transport a diverse mix of energy assets, though three-quarters of it is liquids (NGLs, crude, and condensate).
The bulk of its revenues come from midstream services, almost 70% of which follows the take-or-pay (fine) model, making the revenue quite stable against market headwinds and oil price fluctuations. Out of the three pipeline giants in Canada (Enbridge and TC Energy are the other two), it carries the least amount of debt proportional to its size.
Pembina is one of the few large-cap energy giants that can be bought (especially at the current discounted price) for both dividends and long-term growth potential, making its overall return potential quite attractive.
It’s not a dividend aristocrat, but its payouts have historically been financially stable and have seen a modest pattern of growth in the past.
The company is seeking diverse growth opportunities in the form of a massive LNG project and one of the largest carbon sequestration projects in the world that’s capable of serving multiple industries. It’s also an attractive value-buy at the time of writing.
4. ARC Resources
- Ticker: ARX.TO
- Forward Dividend Yield: 3.49%
- Dividend Payout Ratio: 12.00%
- Dividend Yield (12-Month Trailing): 2.99%
- Upcoming Dividend Date: Oct 16, 2023
- Market Cap: $12.95 Billion
- Forward P/E Ratio: 8.23
ARC Resources is solely focused on the Montney Basin in Alberta and BC. This upstream company has developed a natural gas processing capacity of roughly 1,700 MMcf per day and liquids processing capability of roughly 105 MBOE per day.
This makes it the largest condensate producer and the third-largest natural gas producer in the country. The financial position of the company is also quite healthy. It has relatively low debt, high-value assets and is rapidly growing its LNG capabilities. The company has grown its net income from about $200 million in 2016 to $2.3 billion in 2022 – that’s over 10x growth.
Thanks to its strong income, the stock is quite undervalued despite the post-COVID bullish growth that pushed the stock up to a 130% premium on the pre-pandemic peak. The company has also been growing its dividends at a decent pace without negatively impacting its financial stability.
Its current position as one of the largest energy producers in the country, coupled with strong finances, makes it an appealing prospect, especially at the current valuation.
- Ticker: GEI.TO
- Forward Dividend Yield: 7.36%
- Dividend Payout Ratio: 85.23%
- Dividend Yield (12-Month Trailing): 7.45%
- Upcoming Dividend Date: Jan 17, 2024
- Market Cap: $3.34 Billion
- Forward P/E Ratio: 13.09
Gibson is a mid-cap, midstream company with a modest 500 km pipeline network and a sizable 14 million barrel storage capacity. The company claims to “touch” one in every four barrels of oil that have been produced in Western Canada, which reflects the scope of its operations and the reliance of other energy companies (primarily midstream) on its storage operations.
It has two major terminals, Hardisty, which comes with an exclusive unit rail facility, and Edmonton Terminal, which is strategically located.
Oil supply chain/transportation routes rarely change, and pipelines tend to stay put, which makes Gibson a long-term prospect. As long as Western Canada’s oil production doesn’t take a serious hit for a long time, Gibson is likely to stay in business.
The business model also makes its revenues even more stable than pipeline companies, with almost 95% being under the take-or-pay (fine) model.
One of the characteristic strengths of this stock (apart from business model and financial resilience) is the stock’s recovery potential after every major fall, which means if you buy at the right time (during a slump), you may expect a decent return on your investment when the stock makes a healthy recovery.
Currently, its dividend yield is another attractive feature of the stock (over 7%), though its dividend history has been quite decent for a long time. It has consistently grown its payouts between 2019 and 2023.
6. Parex Resources
- Ticker: PXT.TO
- Forward Dividend Yield: 5.44%
- Dividend Payout Ratio: 16.60%
- Dividend Yield (12-Month Trailing): 3.75%
- Upcoming Dividend Date: Sep 29, 2023
- Market Cap: $2.86 Billion
- Forward P/E Ratio: 4.66
Parex Resources offers a unique opportunity to Canadian investors, i.e., investing in a Canadian energy company that’s dominating a foreign market – Colombia. Parex has emerged as the largest independent oil and gas company in Colombia, with access to about 5.8 million net acres.
That’s more than 37 Torontos. In the ten years of operating in Colombia (between 2012 and 2022), the company grew its assets by about 280% and net income by over 15 times. It’s easy to see that the company is growing, and the best part is that it’s doing that with almost no debt and half a billion dollars in cash and investments.
Parex Resources is also one of the handful of energy stocks in Canada that moved beyond the 2014 peak well before the post-pandemic bull market.
The stock has risen 400% in the last ten years, one of the highest growth rates on this list, and the growth is protracted over the entire decade and doesn’t just come from the bullish phase of the last couple of years. The stock is also quite undervalued, trading for a price-to-earnings of around four, and is offering a healthy dividend yield.
7. Vermilion Energy
- Ticker: VET.TO
- Forward Dividend Yield: 2.29%
- Dividend Payout Ratio: 3.82%
- Dividend Yield (12-Month Trailing): 2.15%
- Upcoming Dividend Date: Jan 15, 2024
- Market Cap: $2.88 Billion
- Forward P/E Ratio: 4.74
Vermilion Energy is an energy producer with a healthy international presence. About a third of its production volume comes, and two-thirds of its Free Cash Flow (FCF) comes from its international assets that include both on-shore and off-shore assets. Apart from North America, the two main regions it focuses on are Europe and Australia.
It dominates in at least two countries, i.e., Ireland, where it’s the second largest on-shore gas producer, and France, where it is responsible for two-thirds of the domestic oil produced. The international presence offers more than just shelter from local headwinds; it provides access to differences that should (ideally) sustain the company when the local market is weak.
Unfortunately, that’s not how it played out, and between 2014 and 2020, the company lost about 95% of its market value. It made a decent recovery afterward and is currently in the correction phase after the recovery.
This has made the stock incredibly attractive from a valuation perspective as it’s currently one of the most undervalued stocks in the energy sector, while its revenues normalize after a temporary boost.
Revenue and Cash Flow in Oil Companies
Oil companies make money by extracting, refining, and selling oil and oil-based products like gasoline and plastics. The amount they earn depends on their size, how much oil they produce, and the current price of oil globally.
Cash flow is about what’s coming in versus what’s going out. A good way to measure this is by looking at operating cash flow, which is the cash made from the main business activities.
A successful oil company would have strong operating cash flow, meaning its main business activities are profitable and can cover its regular and capital expenses. But several factors can affect this:
- Oil Prices: The global price of oil directly affects a company’s revenue and cash flow. High prices can lead to increased revenue and strong cash flow, while low prices can do the opposite.
- Operating Costs: Extracting and refining oil can be pricey. High costs can significantly reduce a company’s cash flow.
- Capital Expenditure: Oil companies often need to spend a lot on exploration and drilling to keep up or increase their production, which can eat into their cash flow.
- Regulation and Taxation: Changes in government policy or tax laws can affect an oil company’s expenses and therefore its cash flow.
- Market Demand: How much demand there is for oil and its products directly affects the revenue and cash flow of an oil company.
Tracking an oil company’s revenue and cash flow gives you a sense of its financial health and its ability to fund its operations, invest in growth, and provide returns to shareholders.
Oil As An Investment
Oil, or black gold as it was called once upon a time, was the most valuable commodity and resource in the world until data replaced it.
And even though its importance when it comes to moving the world is still undiminished, a significant shift is coming, and you should know about it before divesting a portion of your capital to oil stocks. That requires understanding oil as a commodity.
In 2022, about 100.1 million barrels of oil were produced daily (on average). This is the highest number yet and a significant step up from 2021.
Most of the oil in Canada and the US is used for transportation: 60% for Canada and about 66% for the US. The industrial sector consumes about 30% of oil, and the rest is used in the commercial and residential sectors.
And even though the trend varies from country to country, the bulk of the world’s oil is used in transport (roughly two-thirds), and that’s one area where oil might see serious competition in the coming years.
Renewable Energy and Oil Stocks in Canada
The majority of the energy sector is dominated by oil and gas giants from the list above. These companies had historically provided investors with strong returns and dividends. But, the oil and gas sector had been facing some tough challenges, including concerns about climate change, changing regulations, and market instability.
On the flip side, Canada’s renewable energy sector is smaller but growing fast. The push for cleaner energy and falling costs of renewable technologies are the main driving factors. But remember, this sector also has its uncertainties, particularly around regulations and technology advancements.
So, if you’re considering investments, you’d need to weigh up the past performance of the oil and gas sector against the potential future growth of the renewable energy sector. The expectation is that renewable energy will gradually take up a larger share of the energy mix in Canada, but the speed of this shift is hard to predict.
Oil and Electric Vehicles
Coal is by far the most polluting fossil fuel source, but oil is right behind it. And most of the oil produced is used as fuel for transportation, emitting Greenhouse Gases (GHG).
That’s one of the reasons why there is a solid push to switch to Electric Vehicles (EVs). The concept is that EVs powered/fueled by clean electricity will help the world curb one of the largest sources of GHG emissions.
So theoretically, the most effective use of oil in the current market (fuel for vehicles) will mostly be gone one day when EVs are everywhere.
That point is far away in the future. EVs only make up a small portion of the total vehicles currently on the roads around the globe (around 1%). And it may take decades till they even cross the 50% threshold.
And the impact on oil companies/oil stocks might still be not as adverse as you might think because most oil companies are also gas companies, the cleaner fuel source.
Simply put, oil stocks are still viable investments, and they will likely remain so for decades to come.
U.S. Oil Stocks To Consider
If you are open to investing in US oil stocks, there are three that you should look into (all stocks trade on NYSE):
- Exxon Mobil (XOM): Exxon is one of the largest oil and gas companies in the world. It’s headquartered in Texas (the largest oil-producing state in the US) and focuses on both upstream and downstream operations. It has about 10,000 fuel stations in the US alone. The stock offers a powerful mix of USD dividends and capital preservation, making it a worthwhile addition to your oil portfolio.
- Chevron (CVX): Chevron is another of the ten largest oil companies in the world. It’s a fully integrated oil company that covers everything from exploration and production to refining and distribution. It has a network of about 8,000 retail fuel stations in the US. It offers slightly better long-term growth potential compared to Exxon and relatively similar dividends.
- Phillips 66 (EOG): It’s a downstream and midstream company spun off from larger ConocoPhillips, and compared to the other two US stocks, it’s relatively small but still a sizeable oil giant.
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Both Canada and the US have their fair share of oil companies, so investors have a decent pool of potential assets to choose from.
Dividends are common and sustainable, but growth can be a bit tricky to take full advantage of. The best way to take advantage of the cyclical growth pattern of most oil stocks would be to buy the dip.
If you want to raise the ESG profile of your portfolio after buying some oil stocks, these ESG stocks might be worth considering.