The Canadian stock market has some good dividend-paying oil stocks across the supply chain, from oilsands reserves to upstream and midstream.
Three no-brainer oil stocks to buy with $1,000
Oil prices have normalized following the post-pandemic cyclical rebound. However, Canadian oil stocks continue to trade near their cyclical highs as demand for oil and gas increases. The recent cyclical upturn has led to significant capital expenditure by oil companies as the global oil supply chain witnessed a shift due to the war between Russia and Ukraine. Further changes are warranted as Canada diversifies its oil exports outside the United States.
This new structural shift places Canadian oil companies in a new phase of growth. Many oil companies are even increasing natural gas production to export it to Europe. The cyclical uptrend has normalized and the winners of this uptrend are:
- Canadian natural resources (TSX:CNQ)
- Royalties owned (TSX:FRU)
- Enbridge (TSX:ENB)
Canadian natural resources
With the world’s second largest oil sands reserves and a cost advantage, Canadian Natural Resources benefited from the cyclical uptrend. It took advantage of high oil prices to acquire more oil reserves to boost production. More production generated higher cash flow, which was used to acquire more assets and pay off some debt. This happened because free cash flow is 43% higher when WTI crude is trading at $80 per barrel and 28% higher at $70 per barrel versus the normalized rate of $60.
Even with a share price of $60, the company is making a good profit because its breakeven, including the dividend amount, is in the mid-$40s per barrel. In a normalized oil price environment, Canadian natural resources will scale back capital expenditures and focus on paying down debt. The more debt the country pays back, the higher its free cash flow, which it uses to pay dividends and buy back shares. It has the flexibility to grow dividends because it will dedicate 60% of free cash flow to shareholder returns. However, dividend growth will be slightly lower.
The stock has risen 5.9% since November 5 after the company reported strong third-quarter earnings.
Own royalty shares
Freehold Royalties was the winner of the last four-year cyclical upturn in the oil sector as it generated more royalty income. The royalty amount is calculated based on the amount of oil produced and the oil price. Freehold used the surplus from the cyclical upturn to build up more reserves, especially in the United States. It partially offset the decline in royalties due to oil price normalization by increasing oil production.
At the end of the third quarterFreehold’s net debt rose to 1.1 times funds from operations from 0.8 times in the year ended September 2024. However, the dividend payout ratio remained at 75% as funds from operations increased faster than dividends. The company’s long-term objective is to maintain the dividend payout ratio at 60%.
Looking at the fundamentals, the chances of a dividend increase in 2026 are slim. However, the return of 7.4% compensates for this risk. The company can maintain its current annual dividend of $1.08 per share even at a WTI of $50/barrel.
Enbridge shares
Enbridge stock is a no-brainer to buy on any given day. The stock is near its all-time high, and it would be better to wait for a dip to guarantee a higher dividend yield. However, if you are not sure whether you will have money to invest, you can invest now. The oil pipeline company will increase its dividend by 3% in 2026 and 5% in 2027, increasing the return on the amount invested.
Enbridge has capitalized on the natural gas opportunity by acquiring two U.S. gas companies and now supplies natural gas to data centers. In addition, it has invested capital in building more pipelines for exports to Europe. All this has led to the leverage ratio increasing to 4.7 times, which the company aims to reduce to 4.5 times in the medium term. Dividend growth is therefore slow despite growing turnover and free cash flow.
#Brainer #Oil #Stocks #Buy