The energy patch has been a losing game for investors — one that has brought about big capital losses as Canada (and the world) fight against climate change by promoting cleaner energy sources. Today, as the oil and gas industry continues to try to fight its way back from the brink of despair, we’ve seen rays of hope in the form of project approvals such as the Trans Mountain pipeline and different LNG projects.
And while the sector is not out of the woods yet, as the world thankfully remains very concerned about protecting the environment, certain energy stocks are cranking out huge amounts of cash flow, while trading at extremely discounted valuations, as these stocks continue to be hit by very negative sentiment and very negative realities.
Here are two discounted energy stocks that investors should consider, as these stocks have the potential to make us rich upon a recovery of the energy sector.
Canadian Natural Resources Ltd. (TSX:CNQ)(NYSE:CNQ) With a diversified portfolio of oil and gas assets in North America, the UK North Sea, and offshore Africa, Canadian Natural is one of Canada’s largest independent producers. The company owns long-life, low decline assets that provide sustainable and predictable cash flow, it has in its portfolio, significant development opportunities and a large undeveloped land base.
CNQ is known for its operational excellence, its top tier execution and its dividend growth and consistency. With 15 years of consecutive dividend increases behind it (for a compound annual growth rate of 17.5%) and a current dividend yield of 4.3%, we can easily see that Canadian Natural clearly has a strong track record of being a solid and reliable dividend-paying stock. This demonstrates reliability that many might not associate with energy companies and energy stocks.
Further proof of the company’s solid risk profile and potential upside lies in its recent first quarter 2019 results, which continued to show strong cash flow increases and yet another dividend increase of 12% to the current annual dividend of $1.50. First-quarter cash flow came in at $2.24 billion, 82% higher sequentially and only marginally lower than first quarter 2018 when oil prices were higher.
Optimism is also showing up on the share buyback side of things as well, as management recognizes the deep discount in CNQ stock’s valuation. The company repurchased 6.65 million shares in the first quarter, and an additional 4.05 million shares were already repurchased early in the second quarter.
Cenovus Energy Inc. (TSX:CVE)(NYSE:CVE) Cenovus Energy is another stock that is sitting on a large resource base, with many years of expansions and projects to support growth for years to come.
This energy giant has also seen strong cash flows coming through in the last five years, in the good years but also in the not-so-good years. In the first quarter of 2019, Cenovus generated more than $1 billion in adjusted funds flow. Even in 2016, when realized oil price per barrel was just over $31.00, Cenovus generated operating cash flow of $1.4 billion.
Yet the stock is also deeply discounted, trading at a price to book multiple of only 1.3 times despite the fact that cash flows remain strong and despite the fact that cash flow and earnings will see a big increase this year and next year due largely to the fact that the integration of the ConocoPhillips (NYSE:COP) acquisition has driven down costs.
These strong cash flows will be used to pay down the company’s debt levels, and we can expect that this will result in a significant reduction in leverage, thereby reducing the risk profile of Cenovus Energy stock and boosting its valuation.
Fool contributor Karen Thomas owns shares of Canadian Natural Resources and CDN NATURAL RES. CN is a recommendation of Stock Advisor Canada.
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