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Rising oil prices are good for these cyclical energy stocks

Darcy Paterson

Sep 15, 2023  
Cyclicals, Oil and Gas

As I write this oil is rising again with WTI crude nearing $89/barrel. Oil producers make more money as prices rise. Here are a few names from the Premium Portfolio that you may want to add to your own portfolio. One of which has risen over 1300%.

Canadian Natural Resources (CNQ)

This is easily one of the best run oil companies in Canada. With a market cap of just over $69 billion it certainly is its largest.

The company trades at a EV/FCF of just over 10 and its current dividend yield is 4.30%. Expect the dividend to increase in 2024 as management has stated that once it hits its debt reduction level, 100% of FCF is going to be returned to shareholders.

Petrobras (PBR)

This is the state-owned oil company of Brazil. This is an integrated oil and gas company with a market cap of just over $96 billion. The company has a tantalizing EV/FCF value of 3.32 which is remarkably cheap. The discount comes as a consequence of it being managed by a left-wing government that makes many Wall Street professionals nervous.

Personally, I believe the potential outweighs the concerns. The company has stated its new dividend policy which promises to return 45% of FCF to investors.

NuVista Energy (NVA.TO)

This is a well run Canadian oil and gas producer with a market cap of just under $3 billion. Located in the Montney region of Alberta, Nuvista produces approximately 77,000 barrels/day of oil equivalent and rising. Its EV/FCF is 9.86 and has an incredible balance sheet with a debt/equity ratio of 0.083.

The management of the company has decided to forgo paying a dividend but that may change in 2024. Instead its focused on pinning down debt which 3 years ago stood at $610 million but is now $169 million. Additionally, the company has started buying back shares which in lieu of a dividend is a great way to reward investors.

We started buying this company in the spring of 2020 at approximately $0.70/share. Since then we’ve seen an appreciation of over 1300%. It’s a gem of a company.

Nuvista, Petrobras, Canadian Natural Resources.
3-Year chart of Long-Term Debt, Shares Outstanding and Dividend Yield of NuVista, Petrobras and Canadian natural Resources.

Fundamentals support further gains

Cyclical oil and gas companies are cheap right now. Fear of inflation derailing the economy are putting downward pressure on valuations despite increasing demand and decreasing supply. Eventually, those fears will be supplanted by the reality that there’s not enough oil to meet demand.