The seldom acknowledged truth about investing in oil stocks is that it will take trillions of dollars in investments to make sustainable energy a reality, and we are multiples away from that.
According to a study by McKinsey, the world will need to invest US$9.2 trillion annually in physical assets to reach net-zero emissions by 2050 – almost three times the US$3.5 trillion spent in 2022 – while radically transforming society by reducing:
- Oil production by 55 per cent
- Gas production by 70 per cent
- Internal combustion engine usage by almost 100 per cent
According to separate studies by Enerdata, we can see the transition simply isn’t happening with oil or natural gas, whose global production increased steadily since the 1990s through 2023, minus a brief pandemic-related contraction.
Electric vehicles (EVs), on the other hand, have lent hope to net-zero aspirations in recent years, with global sales rising exponentially from 100,000 in 2012 to 17 million expected in 2024, bringing the total number of EVs on the road to more than 40 million. That said, this is only a small dent in the almost 1.5 billion vehicles currently roaming the Earth.
Our decades of fossil fuel reliance to come, lost among the fervor of the growing environmental movement, offer investors a long runway to identify quality operations gaining market share and creating shareholder value.
How we picked the best-performing Canadian oil stocks
Our search for the best-performing Canadian oil stocks began with The Globe and Mail stock screener, which we set to sort for energy stocks on Canadian exchanges with returns of 10 per cent or higher year-over-year.
We then sorted the results from highest to lowest return and picked the first 10 stocks with operations in Canada. Here’s what we found:
- PHX Energy Services: 41.57 per cent return.
- Precision Drilling: 42.80 per cent return.
- Imperial Oil: 48.08 per cent return.
- Trans Canada Gold: 50 per cent return.
- Athabasca Oil: 60.48 per cent return.
- International Petroleum: 69 per cent return.
- Source Energy Services: 72.23 per cent return.
- WesCan Energy: 100 per cent return.
- TerraVest Industries: 153.01 per cent return.
- CES Energy Solutions: 175 per cent return.
- (Returns, share prices and market capitalizations are as of July 12, 2024)
Now let’s put these companies to the test and see if their operations and financial performance match up with their superior returns.
10 best-performing Canadian oil stocks
10. PHX Energy Services: 41.57 per cent return
PHX Energy Services, market capitalization C$443.52 million, is an oil and natural gas services company and technology developer with an almost 30-year track record. It is the largest independent supplier of directional drilling services in the North American land market, working with 12 of the top 15 energy producers and drilling about 12 million metres of well bore in 2023.
Management regrouped post-COVID and has strung together three years of increasing net income, including C$22.72 million in 2021, C$29.75 million in 2022 and C$98.58 million in 2023, plus another C$17.45 million in Q1 2024, more than aptly backing up its robust year-over-year return.
The driller’s rosy near-term outlook suggests its recent performance has room to run as oil remains above US$80 per barrel near its decade high.
PHX Energy Services (TSX:PHX) last traded at C$9.40 per share and has added 225.26 per cent since 2019.
9. Precision Drilling: 42.80 per cent return
Precision Drilling, market cap C$1.41 billion, supplies the energy industry with drilling equipment and services, including automated software and analytics to optimize customer results and environmental sustainability.
The company is Canada’s most active driller, a role it occupies in exemplary style, having been profitable over the past five quarters while consistently reducing debt, and rebounding post-COVID by doubling revenue from C$935.75 million in 2020 to almost C$2 billion in 2023. Management is confident in this being a continuing trend thanks to market strength and numerous catalysts for growth (slide 23).
Waving the green flags of profitability and strong share-price momentum, we say: Add this one to your watchlist!
Precision Drilling (TSX:PD) last traded at C$98.63 per share and has added 107.21 per cent since 2019.
8. Imperial Oil: 48.08 per cent return
Imperial Oil, market cap C$51.42 billion, is Canada’s largest petroleum refiner, in addition to a significant producer of crude oil and petrochemicals from coast to coast.
The integrated oil stock has increased its dividend for 29 consecutive years, currently paying C$2 per share per year at a payout ratio of only 24 per cent, according to Simply Wall Street. The rest of its retained earnings are going towards numerous development efforts, including its Strathcona renewable diesel project and upgrades at its Cold Lake operation, which promise to strengthen profitability and grow market share.
Imperial substantiates its year-over-year return with net income in excess of C$1 billion over the past five quarters. Its more than 150 per cent return since 2019 is similarly matched with more than C$14 billion in total profits, granting it optionality as undervalued opportunities present themselves.
Imperial Oil (TSX:IMO) last traded at C$95.97 per share and has added 157.64 per cent since 2019.
7. Trans Canada Gold: 50 per cent return
Trans Canada Gold, market cap C$3.08 million, is currently focused on developing conventional heavy-oil properties in Alberta.
The junior producer has yielded more than 50,000 barrels of consistent oil production from its first well over the past nine months, including sales to Altex (PINK:ALTX) and Cenovus Energy (TSX:CVE). It will break ground on expansion drilling later this summer as it seeks out new partnerships and ownership stakes in wells drilled by larger operators to keep costs low.
Though Trans Canada’s strategy seems to be paying off in terms of growth – as highlighted by revenue of C$430,000 through the past two quarters tripling the C$120,000 collected in FY 2023 – these figures are still too small to hang your conviction on.
Investors should keep a close eye on how the company’s second well fares before establishing the firmness of management’s footing on the path to profitability.
Trans Canada Gold (TSXV:TTG) last traded at C$0.06 per share.
6. Athabasca Oil: 60.48 per cent return
Athabasca Oil, market cap C$2.94 billion, is an energy company developing thermal and light oil assets in Alberta’s Western Canadian Sedimentary Basin.
Athabasca expects to produce about 35,000 barrels of oil per day (bbls/d) in 2024 and generate cash flow of about C$365 million at US$80 per barrel of WTI. Through a long-term lens, the company is sitting on a billion-barrel resource with room for expansion through hundreds of drilling targets.
Though intermittently profitable, the company has raked in more than C$44 million in net income year-over-year, and more than C$500 million since 2019, earning its market conviction with cold, hard cash.
Investors have benefitted from a 13 per cent reduction in fully diluted share count since Q1 2023, with 100 per cent of 2024 free cash flow to be returned to shareholders through buybacks.
Athabasca Oil (TSX:ATH) last traded at C$5.36 per share and is up by more than 640 per cent since 2019.
5. International Petroleum: 69 per cent return
International Petroleum, market cap C$2.51 billion, is an oil and gas exploration and production company active in Canada, Malaysia and France.
The mid-cap oil and gas stock produced 48,800 bbls/d in Q1 2024 from about 468 million barrels in proven and probable reserves, enough for production to continue for another 27 years. These reserves are in addition to more than 1.1 billion barrels worth of organic growth prospects, the majority stemming from the world-class Blackrod property in Alberta.
Given management’s proven ability to turn a profit, including more than US$30 million in net income in each of the past five quarters, and an average of US$180 million per year since 2019, it’s easy to see why investors are piling into the stock.
International Petroleum (TSX:IPCO) last traded at C$20.01 per share and has added 248 per cent since 2019.
4. Source Energy Services: 72.23 per cent return
Source Energy Services, market cap C$162.13 million, is an integrated producer and distributor of frac sand, which is used to fracture rock formations to extract oil and gas. The company is one of the leading logistics providers for oil and gas in the Western Canadian Sedimentary Basin.
Revenue more than doubled from C$249.88 million in 2020 to C$569.75 million in 2023, backed by profitability in each of the past five quarters, lending credence to the stock’s year-over-year performance.
That said, the company has been profitable in only one of the past fiscal five years, reporting C$167.35 million in net income in 2023, with about C$128.6 million of that total resulting from Source Energy’s reassessment of the recoverable value of its operations, as opposed to actual cash generation. When we compare these results to the stock’s 1,660 per cent return since 2019, the fundamentals just don’t match up.
Thanks to its extensive infrastructure network spanning nine terminals, 3,000 rail cars and three mines capable of producing up to 4.8 million tonnes of frac sand per year, Source Energy believes it has the scale to deliver long-term growth, driven by:
- Service diversification.
- LNG Canada‘s rapid ramp up.
- Rising demand for natural gas as a transitional fuel towards a lower-carbon future.
Management’s proven track record of controlling operating expenses while growing gross profitability makes this path a viable one, but net income would need more positive momentum before warranting your hard-earned dollars.
Source Energy Services (TSX:SHLE) last traded at C$11.97 per share.
3. WesCan Energy: 100 per cent return
WesCan Energy, market cap C$4.15 million, is an explorer and developer of light oil and liquids-rich natural gas assets in Alberta and Saskatchewan.
The company reported minimal sales of 121 bbls/d in May, but expects this to ramp up thanks to 2024-2025 drilling informed by 3D seismic data, as well as numerous maintenance and operational improvements.
WesCan has increased revenue by four times amid periods of profitability over the past five years, and management has done well to restructure the company to pay off its debt without overburdening cash flow.
The only caveat is that, like Trans Canada Gold, the company is a tiny operation in the early stages of establishing its track record.
Best to wait this one out until a major discovery or value-accretive acquisition materializes to drum up market sentiment.
WesCan Energy (TSXV:WCE) last traded at C$0.10 per share and has added 66.67 per cent since 2019.
2. TerraVest Industries: 153.01 per cent return
TerraVest Industries, market cap C$1.43 billion, is a diversified industrial company that manufactures and sells home heating products, propane, anhydrous ammonia, as well as natural gas liquids transport vehicles and storage vessels, energy processing equipment and fiberglass storage tanks.
Net income for Q2 FY 2024 and the six months ended March 31, 2024, was C$25.7 million and C$45.03 million, respectively. And it is on pace to far surpass 2023’s total of C$42.07 million, more than justifying TerraVest’s enthusiastic stock price.
Management expects continued growth through the fiscal year across the base portfolio and from recent acquisitions, likely adding another chapter to the company’s uninterrupted run of increasing profitability since 2019.
TerraVest stock (TSX:TVK) last traded at C$73.12 per share and has added 461.17 per cent since 2019.
1. CES Energy Solutions: 175 per cent return
CES Energy Solutions, market cap C$1.76 billion, specializes in vertically integrated chemical solutions throughout the oilfield lifecycle, including drilling, completion, stimulation, wellheads, pump-jacks, pipelines and the midstream market.
The company practices an asset- and capital-light business model that has enabled it to grow while generating profits to reinvest into the business:
- Revenue is up by almost three times from the pandemic low of C$888 million in 2020 to C$2.1 billion in 2023.
- Without counting a C$222 million loss in 2020, net income has grown five times in five years from C$30.11 million in 2019 to more than C$150 million in 2023, with a hefty C$54.5 million collected in Q1 2024 alone.
CES’s business model isn’t merely profitable, it’s efficient too, often operating with a working capital surplus that exceeds total debt, protecting the company from oil’s heightened sensitivity to the macro trends of the day.
Keep a close eye on this oil stock as stability from its biggest customers, whose market caps range from C$10 billion to C$700 billion, allows it to self-fund service expansions and new acquisitions to better capitalize on resilient fossil fuel demand.
CES Energy Solutions (TSX:CEU) last traded at C$7.48 per share and has added 243.12 per cent since 2019.
The risks of investing in Canadian oil stocks
Even though the world will rely on fossil fuels for many decades to come – making oil and gas stocks suitable to a long-term time horizon – it is unquestionably moving away from them, with the International Energy Agency expecting oil demand to barely rise through 2030 thanks to renewable energy development.
This industrial shift coincides with negative sentiment towards polluting industries being at an all-time-high and rising, its moral nature divorced from a company’s ability to turn a profit.
It should then come as no surprise that oil stocks sometimes trade out of line with their assets and financial performance, and even their target commodity, for extended periods of time. This is especially true when investors choose to allocate according to their values, potentially delaying your ability to collect a return from an otherwise exemplary business.
Besides being villainized in the media, oil is also one of the most widely covered commodities, a fact that encourages stocks tied to it to track its volatility and make your holding period a bumpy one.
If you’re willing to wait for cash flow and intrinsic value to prevail, as it always does in the end, you might have what it takes to be a successful investor in oil stocks. Though you’ll only know for sure once you complement our due diligence above with your own and buy some shares.
A step-by-step guide to buying the best-performing Canadian oil stocks
- Choose a prudent amount to invest: The quickest way to determine this number is by figuring out how exposed you are to oil and gas in your existing asset allocation. Given that energy is but one of 11 sectors in the stock market, an equal weighting to the sector would be a little more than 9 per cent. As a rule of thumb, you shouldn’t allocate above this percentage unless conviction in your stock picks is strong enough to merit it.
- Choose an investment account: Canadians can lower their income tax by contributing to a registered retirement savings plan and avoid investment taxes through a tax-free savings account. They can also take advantage of accounts to invest towards education, their first home, or a safety net to assuage the effects of a disability.
- Open your account: Whether you’re interested in having someone manage your money for you, or you’re comfortable investing on your own, keeping costs low is a proven way to maximize your long-term returns. As the only platform in Canada to offer commission-free stock trades, Wealthsimple is the obvious first choice, as most other providers in the country charge C$10 per buy or sell transaction.
- Place your order: Start by looking up the oil stock’s ticker by typing the company’s name into Stockhouse. Then, open your trading platform’s buy page, input the ticker, input the number of shares you’d like to buy, and specify a limit price a penny or two over the ask price. Once you’ve double-checked everything, hit the buy button.
- Rebalance: When your oil stock investments grow too big or too small because of normal market fluctuations, you should right-size them to the percentage determined in step one at least once per year. This can be achieved by selling losers, adding to winners, and reinvesting profits in laggards, supposing business fundamentals remain strong.
How would you frame the investment case for oil? Do you agree or disagree with any stock pick in particular?
Join the discussion: Find out what everybody’s saying about these Canadian oil stocks on the PHX Energy Services Corp., Precision Drilling Corp., Imperial Oil Ltd., Trans Canada Gold Corp., Athabasca Oil Corp., International Petroleum Corp., Source Energy Services Ltd., WesCan Energy Corp., TerraVest Industries Inc. and CES Energy Solutions Corp. Bullboards, and check out Stockhouse’s stock forums and message boards.
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(Top image, generated by AI: Adobe Stock)