Evaluating the top 5 Canadian oil stocks on the TSX

• The oil industry is a contributor to Canada’s economy and an attractive sector for investors on the Toronto Stock Exchange (TSX)
• According to the U.S. Energy and Information Association, in 2022, 98 countries produced about 80.75 million barrels of crude oil, and Canada ranked fourth accounting for 5.6 per cent of the total
• The lack of pipeline infrastructure has led to a reliance on rail and other costly transportation methods to transport oil, affecting the competitiveness of Canadian oil on the international stage
• As the world transitions towards cleaner energy sources and governments implement stricter environmental regulations, oil companies face the risk of stranded assets

The oil industry has long been a significant contributor to Canada’s economy, making it an attractive sector for investors. The Toronto Stock Exchange (TSX) serves as a hub for numerous Canadian oil companies, each offering unique opportunities and inherent risks.

Canada, known for its abundant oil reserves, has emerged as a major player in the global oil industry over the years. The country boasts significant oil resources, primarily in the western provinces of Alberta, Saskatchewan and British Columbia. According to the U.S. Energy and Information Association, in 2022, 98 countries produced about 80.75 million barrels of crude oil, and Canada ranked fourth accounting for 5.6 per cent of the total.

However, investing in Canadian oil companies comes with potential rewards and risks. In this article, we will explore the current state of Canadian oil companies, the five best Canadian oil companies on the TSX for potential investment, and objectively assess the risks associated with investing in oil.

Canadian oil production and reserves

Canada’s oil production primarily relies on the development of oil sands, conventional oil fields, and offshore drilling. The oil sands, concentrated in Alberta, represent the second-largest proven oil reserves in the world after Saudi Arabia. These oil sands consist of a mixture of bitumen, sand and water, creating a unique extraction process. Conventional oil fields in Canada are also significant contributors to the country’s production.

However, the development of Canadian oil resources faces various challenges. The extraction of oil from oil sands is a complex and expensive process, requiring large-scale investments. Issues related to environmental impacts, greenhouse gas emissions and water usage have garnered attention and scrutiny from regulatory bodies and the public. These factors have resulted in heightened operational costs and increased regulatory requirements for oil companies.

Market conditions and price volatility of Canadian oil

The Canadian oil industry is also influenced by global market conditions and price volatility. Oil prices are notoriously unpredictable, with fluctuations influenced by geopolitical events, global demand, supply disruptions, and other factors.

Crude oil prices made headlines in late September in their run-up to break 93 cents, which was only one cent higher than its peak the same time last year. There have been many peaks and valleys since then and price fluctuations can hurt the profitability and viability of Canadian oil projects.

Beyond this, export limitations and pipeline constraints have hindered the ability of Canadian oil companies to access global markets. The lack of pipeline infrastructure has led to a reliance on rail and other costly transportation methods to transport oil, affecting the competitiveness of Canadian oil on the international stage.

The top 5 TSX oil stocks to consider

5. Pembina Pipeline Corp. (TSX:PPL)

Pembina Pipeline (Market cap: C$22.7 billion) operates an extensive network of pipelines, storage facilities and processing plants primarily focused on transporting and processing natural gas and crude oil. The company’s stable cash flows, long-term contracts, and strategic acquisitions make it an attractive investment for income-focused investors. However, risks include fluctuations in commodity prices, regulatory constraints, and potential project delays.

Pembina Pipeline Corp. last traded at C$41.50 per share.

4. Imperial Oil Ltd. (TSX:IMO)

Imperial Oil (Market cap: C$46.7 billion), a subsidiary of ExxonMobil (NYSE:XOM), is an integrated oil company involved in exploration, production, refining and marketing of petroleum products. Its established refining and marketing network, coupled with promising upstream assets, make it a compelling investment option. Yet, risks include possible operational disruptions, regulatory complexities and potential environmental liabilities.

Imperial Oil Ltd. last traded at C$83.12 per share.

3. Cenovus Energy Inc. (TSX: CVE)

Cenovus Energy (Market cap: C$52.6 billion) is an integrated oil and gas company involved in oil sands projects, refining and conventional oil production. Its low-cost operations, strong financial position and focus on sustainability make it an intriguing investment choice. However, risks include the company’s susceptibility to oil price fluctuations, exposure to regulatory changes and potential challenges in expanding its refining capacity.

Cenovus Energy Inc. last traded at C$28.09 per share.

2. Suncor Energy Inc. (TSX:SU)

Suncor Energy (Market cap: C$59.6 billion), Canada’s largest integrated energy company, encompasses upstream and downstream operations, including oil sands development, refining and retail distribution. Its diverse asset portfolio provides stability, while its strong cash flow generation and commitment to cost management make it an appealing investment. However, like Cenovus, risks also include exposure to volatile oil prices, environmental concerns over oil sands and regulatory uncertainties.

Suncor Energy Inc. last traded at C$46.39 per share.

1. Canadian Natural Resources Ltd. (TSX:CNQ)

Canadian Natural Resources (Market cap: C$96.6 billion) is one of Canada’s largest independent crude oil and natural gas producers. Its diversified asset base, including oil sands, conventional crude oil and natural gas reserves provides stability and potential growth opportunities. In addition to price volatility, the risks associated with CNQ involve potential delays in project execution and environmental regulations affecting oil sands production.

Canadian Natural Resources Ltd. last traded at C$89.48 per share.

Risk analysis of investing in Canadian oil companies

Investing in Canadian oil companies, while offering potential profits, involves various risks that must be carefully evaluated.

The crude oil price chart above demonstrates its price fluctuation over a one-year period. As it stands, its price has moved roughly 2 per cent lower.

Pulling the scope back 20 years reveals a similar picture of peaks and valleys with greater intensity. The question on the minds of many investors who have been in the game for some time is, “Where are we now?”

Factors such as the complex and costly extraction process, environmental regulations, price volatility, and transition risks should be considered by investors. Furthermore, the global shift towards cleaner energy sources and the potential for stranded assets should also be accounted for when assessing the long-term prospects of Canadian oil companies. As with any investment, it is important to conduct thorough research, monitor market trends, and consult with financial advisors before making any investment decisions in Canadian oil companies.

Environmental considerations and transition away from fossil fuels

As the world transitions towards cleaner energy sources and governments implement stricter environmental regulations, oil companies face the risk of stranded assets. Stranded assets refer to reserves of oil and gas that may become financially or economically unviable because of changes in market conditions or regulatory policies. Investors should consider the potential risks associated with holding assets that could lose value or become obsolete in a low-carbon economy.

The Canadian government has committed to achieving net-zero emissions by 2050, implying a transition away from fossil fuels. This commitment poses challenges for oil companies, as the demand for oil could decline over time. Additionally, as the world increasingly adopts renewable energy sources, the demand for oil and its associated products might experience a gradual reduction.

The crude details

Investing in Canadian oil companies on the TSX carries inherent risks because of the volatility of oil prices, environmental concerns and regulatory uncertainties. It is crucial for investors to thoroughly evaluate these risks in conjunction with their investment goals and risk tolerance.

Moreover, it is important to remember the oil industry is subject to global economic conditions, geopolitical factors and technological advancements, which may impact the overall industry’s performance. Diligent ongoing monitoring and assessment of each company’s financial health, growth initiatives and risk management strategies are necessary to make informed investment decisions.

To keep up with the latest developments among public Canadian oil companies, visit Stockhouse’s trending energy news page.

Join the discussion: Find out what everybody’s saying about public companies and hot topics about stocks at Stockhouse’s stock forums and message boards.

The material provided in this article is for information only and should not be treated as investment advice. For full disclaimer information, please click here.