Why Income Investors Should Dig Into Canadian Oil Sands

Canada is often overlooked by U.S. investors given its proximity, but the Great White North has its own market catalysts and very interesting income plays that deserve a closer look.

With the S&P 500 average dividend yield at 1.9%, there is a burning desire to find higher-yielding investments.

But U.S. investors looking for great income plays don’t have to go all that far. Just look to the Great White North.

canadian-sands-oil

Canada has become a more integral player in the oil market thanks to the controversy over the Keystone XL pipeline. The pipeline was proposed to bring heavy crude from Canadian oil sands to the U.S. Gulf Coast refineries. The U.S. reneged on building it, and as a result, Canada built its own pipeline —one that spans from Canada’s West Coast to its East Coast.

This allows Canada to use more of its own oil from the oil-rich sands in Alberta. The U.S. has been virtually the only buyer of Canada’s oil sands production for quite a while. But with its own coast-to-coast pipeline, Canada is opening itself up to the international markets.

Canada has the potential to ship more oil to Asia, where demand is growing. Oil-importing countries in Europe are also likely buyers due to geopolitical pressures on oil supplies from Russia and Iraq.

If the Keystone XL is ever built, it would be just another positive for Canadian oil sands companies.

We’ve found three great Canadian issues that focus on the bustling Canadian oil sands, trade at a discount to the S&P 500 and offer superior dividend yields. Here are three sterling income stocks from the Great White North:

No. 1: Suncor Energy Inc. (NYSE: SU)

Suncor is one of the well-known players in the oil sands space. It offers a 2.9% dividend yield and is the world’s largest oil sands producer, with a focus on northern Alberta — which is only second to Saudi Arabia when it comes to oil-sands-producing regions. The beauty of oil sands is that they maintain their output over long periods of time.

Shares of Suncor trade at a forward P/E ratio (price-to-earnings ratio based on next year’s earnings estimates) of just 10. The S&P 500’s forward P/E is 16.4.

Suncor also has one of the best balance sheets in the industry, with net debt (debt less cash) that’s just 10% of its market cap. Compare that to another oil and gas giant like Apache Corp. (NYSE: APC), which has net debt that covers 30% of its market cap.

No. 2: Cenovus Energy Inc. (NYSE: CVE)

Cenovus offers the highest dividend yield of our three Canadian stocks, coming in at 3.7%. It’s another major player the Canadian oil sands, with operations in Alberta and Saskatchewan.

Heading into 2014, Cenovus had proven reserves of 1.4 billion barrels of oil equivalent. Even at today’s low oil prices of under $90 a barrel, that’s still a lot of money to be made. Cenovus also generates revenues from refining of crude oil products at two refineries in the U.S.

Cenovus doesn’t appear to be all that cheap, trading at the highest forward P/E ratio of the three, coming in at 15. However, with its strong expected earnings growth, Cenovus’PEG (P/E ratio-to-expected growth rate) ratio is still just 1.0 — anything at or below 1.0 is considered a buy.

No. 3: Canadian Natural Resources (NYSE: CNQ)

Canadian Natural has oil and gas operations in Western Canada, Africa and the U.K. Although it offers the smallest dividend yield of our three stocks, at 2.2% dividend yield, that’s still better than the S&P 500 yield.

Canadian Natural’s balance sheet isn’t as strong as Suncor’s, but the company has made a commitment to put free cash flow toward dividends, followed by share buybacks.

The company has noted that debt repayment isn’t so much a priority right now as rewarding shareholders. Canadian Natural also trades at a very compelling valuation, with a forward P/E ratio of 10.

Although Canada borders the U.S., it’s still a very different market. Its oil independence is being driven by oil sands. Consider these three dividend payers at the forefront of this market.

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Published by Wyatt Investment Research at