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Canada’s Oil Stocks Are Trading At Bargain Basement Prices

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·6-min read
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This year, the energy sector has emerged as a standout performer in the U.S. stock market, managing to outperform even the red-hot consumer cyclical sector. The sector's most popular benchmark, the Energy Select Sector SPDR ETF (NYSEARCA:XLE) has rocketed 49.3% in the year-to-date, marking its best performance in more than a decade as oil and gas prices continue taking out multi-year highs.

The crazy rally has forced some of the biggest oil bears to do an about-face while other punters already have $200 oil in their crosshairs.

However, the American energy market has nothing on its neighbor to the north: Canada's famous Oil Patch.

The Canadian energy market has been playing chess while everyone else is playing checkers: the country's energy benchmark, Horizons S&P/TSX Capped Energy ETF (HXE.TO), is up a roaring 71% YTD, 21 percentage points better than its American brethren and more than 4x higher the S&P/TSX Composite Index return.

Horizons HXE seeks to replicate the performance of the S&P/TSX Capped Energy Index, net of expenses. The S&P/TSX Capped Energy Index is designed to measure the performance of Canadian energy sector equity securities included in the S&P/TSX Composite Index.

HORIZONS S&P TSX CAPPED ENERGY ETF
HORIZONS S&P TSX CAPPED ENERGY ETF

Source: Y-Charts

Over the past few years, a vicious one-two-three punch started with a gloomy long-term future outlook due to rampant fossil fuel divestments, climate change policies, and decarbonization as well as shorter-term, but severe shocks from the COVID-19 crisis threw Canada's most important exports industry into an existential crisis. Meanwhile, the drumbeat of exits by foreign oil firms bailing on the unprofitable tar sands added an extra layer of gloom for an industry that's responsible for a fifth of Canada's exports.

But with the oil and gas come back, long-suffering Canadian energy stocks are beginning to look like real bargains.

Here are 5 that have been truly impressive.

#1. Tamarack Valley Energy Ltd.

Market Cap: $1.16B

YTD Returns: 191%

Headquartered in Calgary, Canada, Tamarack Valley Energy Ltd. (OTCPK:TNEYF) is a small oil company that acquires, develops, and produces crude oil, natural gas, and natural gas liquids in the Western Canadian sedimentary basin.

Tamarack Energy primarily holds interests in Alberta Cardium light oil plays in Wilson Creek, Pembina, Alder Flats and Garrington and Lochend areas in Alberta. It also owns Viking light oil resource plays in Redwater in Alberta.

The company's latest set of results has been impressive: Q1 revenue of C$93.43M (+41.0% Y/Y) and GAAP EPS of C$0.00, while Q2 revenue clocked in at $152.17M (+359.3% Y/Y) while GAAP EPS came in at $0.67.

Although Tamarack's debt has surged after making several accretive acquisitions, it could come down by nearly 50% with the current high level energy prices.

#2. Neo Lithium Corp.

Market Cap: $622.2M

YTD Returns: 182%

Toronto-based Neo Lithium Corp. (OTCQX:NTTHF) is a lithium brine exploration company that engages in the exploration and development of resource properties. The company owns a 100% interest in the Tres Quebradas project covering an area of approximately 35,000 hectares, including a solar complex of approximately 16,000 hectares located in Catamarca Province, Argentina.

Neo Lithium shares have been on fire following the company's discovery of a new deep brine aquifer near its existing 3Q project site in Argentina. The company reported that every new drill hole intercepted high-grade brine at a depth of up to 362 meters and outside of the previous resource estimate in 2018 vs. a previous resource estimate in the northern high-grade zone that went only to 100 meters.

Neo Lithium expects to deliver a positive new resource update in Q2, which will include all the new deeper and off-strike drill holes in Q2.

#3. Crescent Point Energy Corp.

Market Cap: $3.0B

YTD Returns: 120%

Another Calgary-based oil company, Crescent Point Energy Corp. (TSX:CPG)(NYSE:CPG) explores, develops, and produces light and medium crude oil and natural gas reserves in Western Canada and the United States. The company's crude oil and natural gas properties, and related assets are located in the provinces of Saskatchewan, Alberta, British Columbia, and Manitoba.

Crescent Point shares once traded above $45 per share and even paid out a generous dividend, compared to the current $5.15 share price. Unfortunately, the 2014 oil price meltdown left the company battling plunging cash flows and high debt levels leading to heavy dividend cuts–and the shares have never fully recovered. Even after this year's 120% gain, Crescent Point shares are trading 80% below 2014 levels.

Thankfully, the ongoing oil price rally has allowed Crescent Point to start generating healthy cash flows and make several strategic acquisitions. That said, this stock is likely to remain volatile, and any setbacks in the near future could send the shares crashing again.

#4. Cenovus Energy Inc.

Market Cap: $22.8B

YTD Returns: 87%

Canadian Oil Sands oil company Cenovus Energy (NYSE:CVE) develops, produces, and markets crude oil, natural gas liquids, and natural gas in Canada, the United States and the Asia Pacific region. The company operates through Oil Sands, Conventional, and Refining and Marketing segments.

CVE shares have shot to a 52-week high after J.P. Morgan upgraded the shares to Overweight from Neutral with a C$14.50 price target (45% potential upside), citing progress on execution of last year's takeover of Husky Energy (OTCPK:HUSKF).

Cenovus shares remain undervalued, and with WTI now above $80/bbl for the first time in four years, the company is in a great position to generate enough free cash flow to buy back its ConocoPhillips' stake.

#5. Imperial Oil Limited

Market Cap: $23.8B

YTD Returns: 80%

A subsidiary of Exxon Mobil Corporation (NYSE:XOM), Imperial Oil Limited (NYSE:IMO) is an integrated oil company that produces and sells crude oil and natural gas in Canada. As of December 31, 2020, the company Upstream segment had 138 million oil-equivalent barrels of proved undeveloped reserves.

A few months ago, Imperial Oil announced plans to move ahead with the production of renewable diesel at a new complex at its Strathcona refinery in Alberta. The facility is expected to produce ~20K bbl/day of renewable diesel when it is completed in 2024, which the company says could reduce emissions in the Canadian transportation sector by 3M metric tons/year.

The company says the renewable diesel will be produced from blue hydrogen, involving natural gas reforming accompanied by carbon capture and storage.

By Alex Kimani for Oilprice.com

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