Will You Buy These Energy Stocks on the Cheap?

Should you buy Cenovus Energy Inc. (TSX:CVE)(NYSE:CVE) or its competitor for the next year?

| More on:

Energy stocks are not the type of company that you want to hold for long-term investment because of their volatile nature. The way to make money in energy stocks is to buy them on the cheap and sell them after they appreciate. It’s easier said than done, however.

Right now, as the WTI oil price trades at close to its two-year low at US$52 and change per barrel, we find these energy stocks to be bargains.

Cenovus Energy

Cenovus Energy (TSX:CVE)(NYSE:CVE) is an integrated oil and gas producer with about 18% of natural gas production. It estimates to produce about 486 million barrels of oil equivalent per day. It also has a refining capacity of roughly $241 million barrels per day.

Cenovus has an investment-grade S&P credit rating of “BBB.” It has been reducing its debt levels steadily from $9.5 billion in Q4 2017 to $8.8 billion in the last reported quarter of Q3 2018.

pipeline with snow

Transport by rail and new pipeline construction will be beneficial to Cenovus in getting the commodities to the target markets, including the United States. Cenovus has signed agreements to transport up to a quarter of its production by rail. That said, pipelines are still a more efficient way of transportation.

Cenovus is a turnaround story. It had a recent net margin of -3.4%. It also needs to pay off its roughly $8.8 billion of long-term debt. Right now, Thomson Reuters has a mean 12-month target of $14.50 per share on Cenovus for near-term upside potential of nearly 34% from $10.85 per share as of writing.

Husky Energy

Husky Energy (TSX:HSE) has been working on acquiring MEG Energy, which it believes will enable it to generate more free cash flow. Now is a good time to make acquisitions because energy stocks are cheap. So, even though Husky is paying a premium of 44% (based on the cash offer of $11 per MEG share) from MEG’s recent quotation, or a cash flow multiple of about 10.7, it’s actually still a decent valuation.

Husky is able to make this acquisition because it has a stronger balance sheet and solid cash flow generation. It has an S&P credit rating of “BBB+” compared to MEG’s non-investment grade rating of “BB-.”

In the last four reported quarters, Husky generated almost $4.2 billion of operating cash flow. Even after subtracting capital spending, it still had more than $1 billion of free cash flow. In the last reported quarter, it also had $2.9 billion of cash and cash equivalents and almost $5 billion of long-term debt.

Husky had a recent net margin of 8.4%. Currently, Reuters has a mean 12-month target of $20.30 per share on Husky for near-term upside potential of 35% from $15.03 per share as of writing.

Investor takeaway

Energy stocks are for investors with an above-average level of risk tolerance. Between Cenovus and Husky, Husky’s balance sheet is a bit stronger. So, Husky would be a better choice for the near term as both stocks have similar near-term upside. If these aren’t right for you, consider these Foolish ideas for price appreciation.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng has no position in any of the stocks mentioned.

More on Dividend Stocks

Train cars pass over trestle bridge in the mountains
Dividend Stocks

Is CNR Stock a Buy, Sell, or Hold for 2025?

Can CNR stock continue its long-term outperformance into 2025 and beyond? Let's explore whether now is a good time to…

Read more »

coins jump into piggy bank
Dividend Stocks

The Smartest Dividend Stocks to Buy With $500 Right Now

These top dividend stocks both offer attractive yields and trade off their highs, making them two of the best to…

Read more »

Middle aged man drinks coffee
Dividend Stocks

Here’s the Average TFSA Balance at Age 35 in Canada

At age 35, it might not seem like you need to be thinking about your future cash flow. But ideally,…

Read more »

ETF stands for Exchange Traded Fund
Dividend Stocks

How to Invest Your $7,000 TFSA Contribution in 2024

Here's how I would prioritize a $7,000 TFSA contribution for growth and income.

Read more »

a man relaxes with his feet on a pile of books
Dividend Stocks

CPP Pensioners: Watch for These Important Updates

The CPP is an excellent tool for retirees, but be sure to stay on top of important updates like these.

Read more »

Technology
Dividend Stocks

TFSA Investors: 3 Dividend Stocks I’d Buy and Hold Forever

These TSX dividend stocks are likely to help TFSA investors earn steady and growing passive income for decades.

Read more »

four people hold happy emoji masks
Dividend Stocks

Love Dividend Growth? Check Out These 2 Income-Boosting Stocks

National Bank of Canada (TSX:NA) and another Canadian dividend-growth stock are looking like a bargain going into December 2024.

Read more »

An investor uses a tablet
Dividend Stocks

A Dividend Giant I’d Buy Over Enbridge Stock Right Now

Enbridge stock may seem like the best of the best in terms of dividends, but honestly this one is far…

Read more »