A look at Canadian energy stocks since 2014 will make your head spin. Here are three examples: Baytex, Vermillion, and Crescent Point – pick any other energy stock and the chart looks roughly the same. They have been decimated, many losing upwards of 90% of value:
So, this begs the question: Are these companies profitable? The answer is YES. Big time – enough to generate significant free cash flow yields and simultaneously pay 8%+ dividends, which is not the norm. Eric Nuttall is one of the few analysts focused on investing in the Canadian energy markets. He makes a strong case for why oil stocks are deeply undervalued, and it all comes down to sentiment:
Oil stocks may be out of favour for one glaring reason: environmentalism and regulations. Climate change is on the top of the agenda, and oil companies are the first targets of new legislations, carbon taxes, etc. Why would anyone throw money at an industry out of favour with pretty much any environmentally conscious investor?
A second factor is oil prices. In order for any of this to be sustainable, oil has to remain at $50+ per barrel. Should prices drop below this and stay there, which they very well could, this whole thesis falls through the floor.
My strategy is to scale in: take small positions now in companies with strong balance sheets and healthy dividends. I like Whitecap Resources, Freehold Royalties and Vermilion Energy. Each company offers something different, but pay a minimum 8.5% dividend.
Is now the time to get in? Only time will tell.