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Where to Invest in Oil Stocks in December 2023

Oil pumps against sunset
Image source: Getty Images

Written by Aditya Raghunath at The Motley Fool Canada

Investing in oil stocks can be quite tricky due to the cyclical nature of the energy sector. Generally, oil prices gain pace during periods of economic expansion, allowing energy companies to deliver substantial cash flows and profits. Alternatively, as oil prices nosedive when global economies contract, profit margins narrow, driving share prices significantly lower.

However, investors can consider gaining exposure to energy infrastructure companies such as Enerflex (TSX:EFX) and TC Energy (TSX:TRP) that generate predictable cash flows across market cycles. Generally, infrastructure companies operate pipelines that transport commodities such as oil and natural gas, for which they charge a fee. These long-term fee-based contracts are tied to inflation, making companies relatively immune to fluctuations in commodity prices.

Due to a stable stream of cash flows, most energy infrastructure companies also pay shareholders a dividend, making them attractive to income-seeking investors.

Is Enerflex stock a good buy right now?

Valued at $700 million by market cap, Enerflex provides energy infrastructure and transition solutions to natural gas markets in the Americas.

It reported adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) of $122 million and operating cash flow of $71 million in the third quarter (Q3) of 2023. Due to strong bookings, it ended Q3 with a record backlog of $1.6 billion in the engineered systems business.

Enerflex is also on track to end the year with a net-debt-to-EBITDA ratio of less than 2.5 times, as it repaid $41 million of long-term debt in Q3.

Enerflex reported a net debt balance of $1.2 billion, including $163 million in cash and cash equivalents. The company also maintains a strong liquidity position with access to $328 million under its credit facility.

Enerflex continues to invest in capital expenditures, which should drive future cash flows higher. Analysts expect its adjusted earnings to widen from $0.21 per share in 2023 to $0.65 per share in 2024. So, priced at 8.8 times forward earnings, EFX stock is quite cheap, and it trades at a discount of 90% to consensus price target estimates.

TC Energy offers you a yield of 7.3%

Among the largest companies in Canada, TC Energy offers shareholders a dividend yield of 7.3%. Moreover, these payouts have risen by 6.4% annually in the past two decades.

Despite a challenging macro environment in 2023, a strong U.S. dollar and TC Energy’s robust business model will allow it to increase comparable EBITDA by 8% year over year.

In recent years, TC Energy has deployed capital to optimize its portfolio, leverage core competencies, and capture growth potential in businesses such as natural gas and power.

TC Energy disclosed plans to spin off its liquids pipeline business to focus on a highly regulated, low-risk, and utility-like portfolio with a balance of income and growth. It also expects to advance $3 billion of asset sales next year, the proceeds of which will be deployed to lower balance sheet debt.

TC Energy aims to end 2024 with a debt-to-EBITDA ratio of 4.75 times while spending between $6 billion and $7 billion in capital expenditures.

Due to its capital growth investments in the natural gas and power businesses, TC Energy expects to deliver comparable EBITDA growth of 7% between 2023 and 2026, which should drive dividend payouts higher.

The post Where to Invest in Oil Stocks in December 2023 appeared first on The Motley Fool Canada.

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Fool contributor Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool recommends Enerflex. The Motley Fool has a disclosure policy.