Written by Karen Thomas, MSc, CFA at The Motley Fool Canada
Crude oil is down 39% in the last year. But it’s up 8% in the last 5 years and it looks like it may be heading higher still, as OPEC+ has extended production cuts until 2024. Here are two oil stocks to buy as we head into this bullish reality.
Pason Systems: An energy services company with a tech focus
Little-known Pason Systems Inc. (TSX:PSI) is a technological leader in the oilpatch. In fact, Pason has been contributing to the digitization of the oilpatch for decades. This is why you should consider this Canadian oil stock.
Pason is an oil and gas services company. This means that it provides the equipment and services that oil and gas production companies require. In Pason’s case, the equipment that it supplies is largely digitized platforms that that give operators an unprecedented view into their oilfields.
For example, the Electronic Drilling Recorder (EDR) is a network of sensors, software, and displays providing real-time drilling data to rig site personnel. Data is transmitted from underground wells and reservoirs, giving operators invaluable information. This increases productivity and efficiencies, and lowers costs for oil and gas operations.
Today, Pason Systems has a market capitalization of $957 million, and it remains the market leader in its industry. Also, Pason has a very strong balance sheet, with no debt and $185 million in cash. Last quarter, revenue increased 32% and its EBITDA margin increased 19% to 53.4%. Cash flow from operations also increased significantly to $46.3 million. Simply put, Pason’s products are in high demand as automation and analytics are increasingly being used. It makes sense – it’s the natural progression of things.
Yet, despite all of this good news, Pason Systems stock has performed poorly in the last year. In fact, it declined 28%. And, it’s trading at a depressed price-to-cash flow multiple of 6.6 times. Also, it trades at 7.8 times earnings, which is below its peer group despite the fact that its returns and margins are far higher.
Suncor Energy: Canada’s integrated oil stock
The second Canadian oil stock that I recommend investing in is Suncor Energy Inc. (TSX:SU). Suncor has been hit by some issues over the last few years. For example, there have been far too many safety incidents at Suncor. Also, operational deficiencies have hit the company.
Today, Suncor has a new CEO. This is a CEO that’s intent on changing things and improving the company, both operationally and safety-wise. The bottom line is that Suncor remains an oil and gas powerhouse, with a well-diversified business and strong and steady cash flows. In 2022, Suncor posted record results. This was driven by strong oil prices as well as strong crack spreads – the difference in price between a barrel of crude oil and the refined products produced from it.
Even in the first quarter of 2023, Suncor’s cash flow and earnings power was on full display, despite lower oil prices versus the prior year. Adjusted operating earnings came in at $1.8 billion and adjusted cash flow from operations at $3 billion.
Suncor Energy continues to have a strong balance sheet, a reliable and growing dividend, and a unique integrated business that should fare well in many operating environments. Today, Suncor stock is trading at very depressed valuations of 6.6 times earnings and 1.3 times book value despite generating high returns and margins. Also, its dividend yield of 5.3% is an added bonus for investors.
Before you consider Pason Systems Inc., you'll want to hear this.
Our market-beating analyst team just revealed what they believe are the 5 best stocks for investors to buy in May 2023... and Pason Systems Inc. wasn't on the list.
The online investing service they've run for nearly a decade, Motley Fool Stock Advisor Canada, is beating the TSX by 23 percentage points. And right now, they think there are 5 stocks that are better buys.
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