A Top Canadian Oil Stock for Buy-and-Hold Investors

Amid pipeline woes, Suncor Energy Inc. (TSX:SU)(NYSE:SU) is a top Canadian oil stock that investors should consider to buy. Here is why.

| More on:
The Motley Fool

It seems the strength in oil prices isn’t enough for investors to get excited about the top Canadian oil stocks.

The bottlenecks in the Canadian pipeline system is the biggest reason for this apathy. These pipeline constraints are stopping these oil-sand producers to ship their products to market. As a result of this glut, the price of Western Canadian Select (WCS) continues to trade at a discount when compared with WTI prices.

Amid these constraints and rising taxes, this situation is unlikely to change in the near term. According to a new forecast by Barclays PLC, the WCS-WTI differential for this year will rise to US$24.60 per barrel. It reached US$21.70 on March 19, down from peaks of nearly US$30 in February.

WCS discounts would cost the Canadian economy about $15.6-billion a year, or 0.75% of GDP, if maintained at current levels, according to Scotiabank Chief Economist Jean-Francois Perrault.

Against this dismal backdrop, should oil bulls stay on the sidelines? I think this is probably a good approach until we see some political settlement on this issue. But long-term investors who want some exposure to oil sector should also look for good entry points if the stock prices of large producers decline further.

For such buy-and-hold investors, I recommend Suncor Energy Inc. (TSX:SU)(NYSE:SU), Canada’s largest oil-sand producer. Here’s why:

Diversification  

Suncor has a good business-mix, which is a type of hedge against falling oil prices. With its extensive oil-sand operations, Suncor also owns refineries and more than 1,500 Petro-Canada service stations. This diversification keeps cash flows strong even during a prolonged downturn in oil prices.

Cost-cutting

Since the 2014 oil downturn, Suncor management has undertaken an aggressive cost-cutting program that has prepared this diversified and integrated oil giant to take advantage of higher oil prices.

During the past five years, Suncor’s cost to dig a barrel of crude oil has fallen to $23.80 in 2017 from $37 in 2013, thereby representing the lowest level achieved in more than a decade. With crude prices trading at more than $60 a barrel, Suncor expects to generate over $10 billion in funds from operations in 2018, giving it a cash flow yield of ~15%.

The bottom line

With a 3.34% annual dividend yield, Suncor has a great track record of rewarding its investors. Last month, Suncor hiked its quarterly dividend by 12.5% to $0.36 per share, marking the 16th year of consecutive annualized dividend increases.

I don’t see Canada’s pipeline constraints easing anytime soon, and so I can’t make a bullish case for the local oil producers. But if you’re a buy-and-hold type investors, buying Suncor stock isn’t a bad idea when its price is down about 9% this year and the company is forecasting to generate decent cash flows.

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.

Fool contributor Haris Anwar has no position in any stocks mentioned.

More on Dividend Stocks

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

edit Woman in skates works on laptop
Dividend Stocks

3 No-Brainer Stocks to Buy Under $30

These three stocks all offer a huge deal for investors looking for dividends, as well as growth that will last.

Read more »

You Should Know This
Dividend Stocks

How to Convert a $300 Monthly Investment Into $338 in Monthly Income

If you want a certain amount in monthly passive income, invest a similar amount today and leave the rest to…

Read more »

Increasing yield
Dividend Stocks

3 Income Stocks With Big Yields to Consider in April 2024

If you haven’t yet made your March investments, here are three income stocks to buy the dip and lock in…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: Don’t Miss Out on This Contribution Hack!

This hack has so many benefits for you -- not just when you put it in your RRSP but for…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Passive Income: 2 Safe Dividend Stocks to Own for the Next 10 Years

Dividend stocks such as Manulife and Fortis can help you generate a stable and recurring passive-income stream.

Read more »

Young woman sat at laptop by a window
Dividend Stocks

3 Dividend Stocks Everyone Should Own for the Long Haul

For investors looking for top-tier dividend stocks to buy and hold for the long term, here are three of my…

Read more »