TSX Energy Stocks Have More Going for Them Than Just High Oil Prices

Here’s why energy stocks have beaten markets this year by a wide margin.

| More on:

Be it tech stocks, gold, or even cryptocurrencies, all have lost immense value amid turmoil this year. One sector that has comfortably flourished is oil and gas. The TSX energy sector has returned a massive 70% this year, while the TSX Composite Index has lost 8% in the same period. The outperformance is quite noteworthy, especially in these kinds of markets. And notably, TSX energy stocks could continue to trade strongly, at least for the next few quarters.

Why are energy stocks outperforming in 2022?

To take it from the top, we all know that the Russia-Ukraine war pushed oil prices higher this year. Yes, that’s certainly the case. But apart from that, what’s fundamentally troubling the global energy markets is the supply woes. And that’s because of the underinvestment in the sector for years.

The supply has been concerningly lower to cater to the rising global oil demand. Even if the energy transition is gaining pace, we just can’t switch from oil and gas altogether instantly. So, more than the war in Europe, the chronic demand-supply imbalance has been keeping oil prices higher.

When oil prices rise, energy producer companies see higher earnings and increased dividends. Among many TSX energy stocks, Canada’s largest energy stock, Canadian Natural Resources, is an apt example. In the first half of 2022, CNQ reported free cash flows of $6 billion, an increase of 71% compared to the same period last year. As a result, it’s rewarded shareholders with generous dividends this year. Including dividends, it has returned 80% so far this year.

Created with Highcharts 11.4.3Canadian Natural Resources PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.ca

A bigger reason behind the energy rally than oil prices

However, this energy rally has been quite different than previous ones. Energy producers have shown great capital discipline since the pandemic. Even when they are sitting on excess cash, despite higher oil prices, producers are not assigning capital to increase production. Instead, they have rapidly repaid debt and saved the rest of the cash for shareholder returns.

Consider Canada’s biggest natural gas producer, Tourmaline Oil (TSX:TOU). It had net debt of $1.7 billion at the end of 2020. Thanks to surging oil prices and its profits, its net debt has fallen to $470 million at the end of the second quarter of 2022. Moreover, Tourmaline paid over $4 per share in dividends this year, indicating a juicy 5% yield.

Created with Highcharts 11.4.3Tourmaline Oil PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.ca

And it was not just Tourmaline. Almost all energy stocks have preferred to repay debt and kept their purse string tight for capital expenses. Declining debt will ultimately improve profitability as debt-servicing costs get lower.

Energy stocks were some of the indebted companies before the pandemic. However, as their balance sheets have notably strengthened in the last few quarters, they have become some of the investor-favourite areas.

TSX energy stocks had an average net debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) ratio close to three before the pandemic. It has now fallen approximately to 0.5. The ratio is a popular leverage measure and indicates how many years a company would take to repay its net debt.

Is it too late to buy TSX energy stocks?

Yes and no! Canadian energy names have already been multi-baggers. They have returned approximately 1,000-2,000% since the pandemic. However, their rally seems far from over, considering the oil price trend and the valuation.

TSX energy names still look well placed to march higher, particularly on their third-quarter earnings. Apart from the higher earnings growth, further net debt reduction and buyback announcements could drive them higher. These growth factors do not have baked in entirely, given their current valuation.

So, even if you missed the previous leg of the rally, it still makes sense to bet on them, considering their improving balance sheets and rallying oil prices.

Should you invest $1,000 in Baytex Energy right now?

Before you buy stock in Baytex Energy, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Baytex Energy wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $21,345.77!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 24 percentage points since 2013*.

See the Top Stocks * Returns as of 4/21/25

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.

The Motley Fool recommends CDN NATURAL RES. The Motley Fool has a disclosure policy. Fool contributor Vineet Kulkarni has no position in any of the stocks mentioned.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Energy Stocks

oil and natural gas
Energy Stocks

1 Magnificent Canadian Energy Stock Down 23% to Buy and Hold for Decades

This oil and gas producer has increased its dividend annually for more than two decades.

Read more »

oil pump jack under night sky
Energy Stocks

Why Suncor Stock Climbed 4% After Earnings

Suncor stock reached record production, so why did shares fall afterwards?

Read more »

A solar cell panel generates power in a country mountain landscape.
Energy Stocks

How I’d Invest $20,000 in Canadian Renewable Energy Stocks to Become Financially Independent

Renewable energy stocks remain some of the best future investments, and these three already show strength.

Read more »

A worker overlooks an oil refinery plant.
Energy Stocks

The Smartest Oil Stock to Buy With $2,000 Right Now

An oil stock that reported strong Q1 2025 financial results is a screaming buy right now.

Read more »

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

I’d Put $5,000 in This Dividend Giant for Decades of Income

Looking for a stock that can provide decades of income in addition to strong growth and defensive appeal? Consider this…

Read more »

engineer at wind farm
Energy Stocks

2 Canadian Oil and Gas Stocks to Buy and Hold Through Energy Transitions

Enbridge is one oil and gas stock that has the network and infrastructure to thrive despite the energy transition.

Read more »

Trans Alaska Pipeline with Autumn Colors
Energy Stocks

Enbridge vs. TC Energy Stock: How I’d Split $12,000 Between Pipeline Dividend Giants

Investing in blue-chip TSX dividend stocks such as Enbridge and TC Energy is a good strategy for income-seekers in 2025.

Read more »

A steel grain silo storage tank with solar panel in a yellow canola field in bloom in Alberta, Canada.
Energy Stocks

3 Canadian Green Energy Stocks to Buy and Hold in Your TFSA for a Sustainable Future

Renewable energy stocks are some of the best options for long-term growth, and these are top options.

Read more »