Guide to Investing In Oil: How to Buy Oil Stocks and ETFs

For years, it seemed like most of Canada’s top growth stocks could be found in the oil and gas sector. The oil price was constantly rising, and Canadians came from across the country to find work in a booming industry. That changed in 2014 as the price of crude oil plummeted, sending the industry into a years-long slump from which they are still recovering.

And while oil and gas remain a vital part of the Canadian economy, companies no longer focus on spending and growth. Instead, they’re looking for profitability and operating efficiency.

Growth Prospects of Oil and Gas Stocks

While the world is undoubtedly moving away from its reliance on fossil fuels, the demand for oil and gas won’t disappear anytime soon. However, companies are much less willing to funnel resources into new and expensive projects. For investors, this is important to note. While there will always be outliers, growth opportunities have waned.

That said, there remains plenty of value in the oil stocks, and they should still be considered a key component of any diversified portfolio with a long-term growth strategy. The question? What is the best way to invest in Canadian oil and gas in 2021?

How to Buy Oil Stocks

For the average investor, there are two ways to invest in the Canadian oil industry. You can either buy individual oil stocks or purchase an ETF that holds oil stocks. As with most stock vs. ETF comparisons, each method has its pros and cons. For example, dividend investors may prefer to purchase individual oil stocks with a high dividend yield, providing they can achieve proper diversification.

Given the uncertain state of the industry, the best bet for most investors is to hold oil and gas stocks inside an ETF. Unless you’re highly knowledgeable about the industry – oil prices, oil companies, market conditions – and are willing to put up with the volatility, ETFs take the guesswork out of stock picking and provide an easy way to incorporate oil and gas in your stock portfolio.

Where to Invest Oil ETFs and Stocks

Whether you’re purchasing stocks or ETFs, you’ll want to open a discount brokerage account via an online broker. It’s the most cost-efficient way to invest in the stock market and the most convenient – you can buy and sell from the comfort of your living room.

In Canada, there are several online discount brokerages to choose from. Our top pick here at MapleMoney is Questrade. We love them for their low trading fees and no-fee ETF purchases. That’s right. With Questrade, you can buy oil ETFs for free and stocks for as little as $4.95. And unlike other online brokers, Questrade won’t charge you an annual fee on registered accounts, like an RRSP or TFSA.

What Are the Best Oil Stocks and ETFs to Buy?

Now, I’m not in the business of making individual investment recommendations. I always advise readers to research and consult with an investment professional before purchasing stocks or ETFs. With that in mind, the following is a list of oil stocks and ETFs to help you get started with your search.

Best Canadian Oil ETFs

To give you an example of what an oil ETF might look like, I’ve selected three for your review. Of course, one of the most significant advantages of an ETF is its low fees. You’ll notice that the Management Expense Ratios (MERs) of the funds I’ve selected hover around .60%.

Most broad-market ETFs have even lower fees, often under .10%. Because oil ETFs are industry-specific, their MERs tend to be a bit higher. It still beats any traditional equity mutual fund. But enough about fees, let’s take a look!

Ishares S&P TSX Capped Energy Index ETF (XEG)

XEG tracks the S&P/TSX Capped Energy Index, intending to provide capital growth over the long term. If you’re looking for a way to buy the top energy companies in Canada, this is one way to do it. One thing to note – this is an ETF with a minimal number of holdings, 13 to be exact. Not only that, but two companies, Canadian Natural Resources, and Suncor make up almost 50% of the fund.

Key Stats

• Asset Class: Canadian Equity
• Canadian Geographic Region: Canada (100%)
• Total Net Assets: $1.3B
• MER: 0.61%
• Dividend Yield: 1.54%
• Notable holdings: Canadian Natural Resources Ltd, Suncor Energy Inc, Cenovus Energy Inc, Imperial Oil Ltd
• Reason to Buy: Provides exposure to the Canadian energy sector with reasonable diversification. The time horizon should be long-term.

BMO Equal Weight Oil & Gas Index ETF (ZEO)

This energy ETF offering from BMO is much smaller than XEG mentioned above, with less than $200M of assets under management. It also tracks a different index, namely the Solactive Equal Weight Canada Oil & Gas Index. This fund isn’t as top-heavy as XEG, as the holdings are equally weighted. The dividend yield is an attractive 3.51%, making this an ideal find for dividend investors.

Key Stats

• Asset Class: Energy Equity
• Geographic Region: Canada (100%)
• Total Net Assets: $185M
• MER: 0.61%
• Dividend Yield: 3.51%
• Notable holdings: Imperial Oil Ltd, Tourmaline Oil Corp, TC Energy Corp, Pembina Pipeline Corp
• Reason to Buy: To gain a balanced exposure to the Canadian energy sector with a goal of long-term capital appreciation and an eye to the dividend yield.

Horizons Pipelines & Energy Services Index ETF (HOG)

If you’re seeking exposure outside of the largest companies in the oil sector, HOG might be the right fit. The fund tracks the Solactive Pipelines & Energy Services Index, which focuses on mid-cap companies in the midstream sector. Midstream refers to businesses engaged in the processing, storing, and transportation of oil and gas. Net Assets of the fund are $21M and holdings spill beyond energy into utilities (8.9%) and industrials (8.2%)

Key Stats

• Asset Class: Energy Equity
• Geographic Region: Canada (100%)
• Total Net Assets: $21.1M
• MER: 0.64%
• Dividend Yield: 3.78%
• Notable holdings: Tidewater Midstream and Infrastructure Ltd, Keyera Corp, Enbridge Inc, Gibson Energy Inc
• Reason to Buy: Oil sector diversification in the midstream sector, exposure to mid-cap companies, dividend yield.

Best Canadian Oil Stocks

I’ve selected three Canadian oil stocks to use in my example of how to invest in the oil industry. Discount brokerages will charge a fee when buying or selling stocks unless the account has zero-commission stock trades. While many US online brokers offer no-fee stock trades, Wealthsimple Trade is one of the lone Canadian brokers waiving the trading fee. As I mentioned earlier, you can trade for as little as $4.95 with Questrade, while standard rates are as high as $9.95/trade with many other brokers.

Parkland Corp (PKI)

Parkland Corp is considered a midstream business in the oil industry because it specializes in the distribution and marketing of fuel and petroleum products. It’s seen phenomenal growth, far outperforming the returns of the S&P/TSX Composite Index over the past decade.

While COVID-19 has taken its toll, if you’re looking for a value stock with real opportunity for growth over the long term, Parkland is one you should consider. You can hold Parkland inside the HOG ETF or purchase the individual stock, which trades under the code PKI on the Toronto Stock Exchange.

Key Fundamentals

• Stock Code: PKI
• Market Cap: $6.0B
• Revenue: $13.9B
• Dividend Yield: 3.11%
• P/E Ratio: 31.4X
• EPS: $1.26
• Shares Outstanding: 150.9M
• Reason to Buy: As per several analyst’s consensuses, PKI is a value stock trading at a discount, well below its price target. As the industry rebounds, expect Parkland Corp results to follow.

Canadian Natural Resources (CNQ)

Canadian Natural Resources is a large-cap stock that pays an attractive dividend of over 4%. They’ve increased their dividend for more than twenty years, a remarkable feat when considering what the industry has been through in recent years. What helps CNQ is that they can operate at a very low cost, so oil prices don’t have to boom for the company to profit. If you’re betting on a recovery, Canadian Natural Resources will be well-positioned.

Key Fundamentals

• Stock Code: CNQ
• Market Cap: $52.7B
• Revenue: $19.0B
• Dividend Yield: 4.22%
• P/E Ratio: 23.7X
• EPS: $1.88
• Shares Outstanding: 1.2B
• Reason to Buy: Large-cap stock paying a consistently high dividend. Low-cost operator with sound fundamentals.

TC Energy (TRP)

Unlike Canadian Natural, which is a large crude oil producer, TC Energy is involved in the development of energy infrastructure, including natural gas pipelines and storage facilities. Like most Canadian oil and gas companies, industry turbulence has hit their bottom line, but the company remains on solid ground.

Despite the cancellation of the Keystone pipeline project, TC Energy still has more than $25B in pipeline projects booked. The stock pays a very high dividend of 5.56%. It’s projected to increase to above 6% in future years. This and more makes TC Energy an excellent oil stock income play.

Key Fundamentals

• Stock Code: TRP
• Market Cap: $61.2B
• Revenue: $13.0B
• Dividend Yield: 5.56%
• P/E Ratio: 25.9X
• EPS: $2.41
• Shares Outstanding: 979.0M
• Reason to Buy: Another example of a large-cap oil stock with a healthy dividend.

Buying Oil Stocks and ETFs with Questrade

If you’ve read this far, and are interested in adding oil to your investment portfolio, one of the easiest and lowest-cost ways to do it is by opening an account with Questrade. High fees can eat into market returns over the long term, so it’s essential to be mindful of how much it costs you to invest.

With Questrade, there are no annual account fees, and they offer hundreds, if not thousands, of commission-free ETFs on their platform. If you’re buying stocks, the trading fees are among the lowest in Canada, at $4.95 per trade. You can open a Questrade account from home in minutes. As soon as you fund your account, you’re ready to go!

Final Thoughts on Investing in Oil Companies

Even though crude oil prices remain low, the energy industry in Canada isn’t going anywhere anytime soon. Growth opportunities still exist, both at the production level and midstream, as do high dividend yields. While oil and gas holdings should never dominate your portfolio, they can make a great complementary investment. If you’re ready to get started, it’s as easy as opening a discount brokerage account and doing a little bit of research.