As the rout in the oil market continues, investors are scratching their heads and wondering which energy companies will be left standing once the smoke finally clears.
Suncor Energy Inc. (TSX:SU)(NYSE:SU) and Canadian Natural Resources Ltd. (TSX:CNQ) (NYSE:CNQ) are two of the expected survivors. Let’s take a look at both companies to see if one offers a better opportunity right now.
Suncor Energy
Suncor is Canada’s largest integrated energy company with assets that include oil sands production, refineries, and retail operations. This unique business model provides Suncor and its investors with a hedge against volatile oil prices because the refining and retail operations offer predictable revenue streams.
Suncor’s oil sands properties are expected to produce for decades and the company continues to improve its operating efficiency at the sites. Production hit a record 412,000 barrels per day in the third quarter of 2014 and output should continue to be strong this year.
Suncor is doing a good job of keeping costs down, with Q3 operating cash costs coming in at $31.10 per barrel. This still isn’t the best rate in the patch, but it is moving in the right direction.
On the refining side, three of the company’s four refineries were recently upgraded and all four should be operating smoothly through 2015. Lower feedstock costs should help refining margins in the next few quarters.
Retail revenues remain solid due to the strength of Suncor’s Petro-Canada service stations.
Suncor pays a dividend of $1.12 per share that yields about 3.25%. The distribution should be safe.
Canadian Natural Resources
Canadian Natural is the latest energy giant to announce capital expenditure cuts for 2015. The company now expects production growth of about 7% for the year compared to the previous target of 11% as a result of the 28% reduction in spending.
Canadian Natural probably owns the best asset mix in the Canadian energy patch. Its portfolio boasts top-tier holdings in natural gas, natural gas liquids, oil sands, and conventional oil. The company owns 100% of most of its assets and this gives Canadian Natural a lot of flexibility with regards to capital allocation.
Canadian Natural pays a dividend of $0.90 per share that yields about 2.8%. The company has a very low payout ratio so the dividend is probably safe.
Which one is the best pick?
Both Suncor and Canadian Natural Resources have rock solid balance sheets and should be good long-term investments, but a continued slide in both stocks is likely in the near term. I would expect both companies to increase share buybacks on any further price weakness.
The safest bet is probably Suncor due to its integrated business model. However, Canadian Natural has a huge war chest and will probably start picking up prized assets at fire-sale prices as the carnage continues in the energy space. This will position it very well for an eventual rebound in oil prices.
It is probably best to avoid the energy producers altogether right now, but there is one energy company that is winning regardless of the direction oil prices go.
