The energy sector is driving the TSX higher in 2024. Canada’s primary stock market is up 7.19% year to date due to energy stocks’ strong collective performance. If you have an investment appetite, the sector has incredibly cheap options today.
Athabasca Oil (TSX:ATH) and Tamarack Valley Energy (TSX:TVE) trade at less than $5 per share yet have market-beating returns. Both stocks have risen from obscurity and have visible growth potential in 2024.
Winning investment
Athabasca Oil is a winning investment, as evidenced by the 591.55% overall return in the last three years. Had you invested $6,000 in May 2021, your money would be $41,492.96 today. At $4.91 per share, current investors enjoy a 17.75% year-to-date gain. Market analysts’ 12-month average price target is $6.19 (+26.1%).
The $2.74 billion energy company develops thermal and light oil assets in Alberta’s Western Canadian Sedimentary Basin. This liquids-weighted intermediate producer operates in Montney, Duvernay, and the oil sands, all are active resource plays. Thermal oil boasts low-decline production, while light oil delivers high margins and rich returns.
In the first quarter (Q1) of 2024, revenue increased 7.1% year over year to $301.75 million, while net income reached $38.5 million compared to the $56.6 million net loss in Q1 2023. Duvernay Energy, a 70/30 equity sharing with Cenovus Energy and the latest growth driver, commenced operations in early February 2024.
The company spent $42 million to expand Leismer, its crown jewel. Athabasca expects progressive production growth of 40,000 barrels per day (bbl/d) over the next three years.
One of Athabasca’s strengths in supporting the return of capital to shareholders is cash flow generation. The thermal oil business should generate $1.2 billion in free cash flow (FCF) in three years. For 2024, management commits to allocating 100% of FCF (not including Duvernay Energy) to share buybacks.
The investment takeaways for Athabasca include its top-tier, long-life asset base and robust FCF profile. Furthermore, the stable production additions from Leismer’s assure sustainable growth. Duvernay Energy can self-fund its development plan and achieve its deep drilling inventory growth targets.
Enhanced shareholder returns
Tamarack Valley is well-positioned to deliver enhanced shareholder returns through dividend payments and share buybacks. At $3.69 per share, the year-to-date gain is 21.92%, while the dividend yield is 4.07%. Based on market analysts’ average price forecasts, the one-year upside potential is 99.7% ($7.37).
The $2.74 billion oil and gas company owns assets or oil plays in Charlie Lake, Clearwater, Cardium, and several enhanced oil recovery (EOR) opportunities in Alberta. In Q1 2024, Tamarack’s total revenue (oil and natural gas) increased 4% to $393.3 million versus Q1 2023 but incurred a net loss of $32.7 million.
Notably, cash flow from operating activities and free funds flow soared 177% and 486% year over year to $165.2 million and $53.3 million. Besides the higher funds flow, Tamarack realized higher pricing margins during the quarter. Dividend payments and share buybacks reached $46.4 million.
Its president and chief executive officer, Brian Schmidt, credits the high grading of asset quality three years ago for the impressive quarterly results. The near-term plan is to focus on core assets, increase oil weighting, improve pricing margins, and implement projects with multiple payouts.
Best deals
Athabasca Oil and Tamarack Valley Energy are the best deals in May. Both stocks can deliver far superior returns than their larger peers in the energy sector.
