The Canadian Energy Stock I’d Buy Right Now and It’s a Bargain

Over the last few months, most Canadian investors looking at energy stocks have been focused almost entirely on traditional oil and gas companies.

And it makes sense. The war in Iran has pushed commodity prices higher and driven strong cash flow across the sector. And while many investors understood this wasn’t likely to be a prolonged conflict with oil staying above $100 for an extended period, it still has broader implications for the energy industry.

For example, it has reinforced just how important it is for countries to diversify their energy infrastructure and energy imports, which could be a major long-term tailwind for Canadian energy stocks.

At the same time, it’s also a reminder of the growing role renewable energy continues to play, especially as electrification continues to rapidly increase globally and demand for power keeps increasing.

So, while many Canadian oil stocks are in the spotlight right now, some of the more interesting long-term opportunities may be in renewable energy stocks that continue to trade at compelling valuations while they remain out of favour.

With that in mind, here’s why Northland Power (TSX:NPI) might be one of the best Canadian energy stocks to buy now, especially while it continues to trade at a bargain.

Why Northland Power looks attractive today

Savvy investors know the best time to take long-term positions is when high-quality stocks are out of favour. And right now, much of the pressure Northland has faced in recent years has come from external factors.

For example, as interest rates moved higher, renewable energy stocks became less attractive to investors, especially those built around long-term infrastructure projects that rely heavily on financing, like Northland.

At the same time, rising construction and development costs from inflation made new projects more expensive, which also weighed on sentiment across the sector.

As a result, expectations cooled, and many renewable energy stocks, including Northland, saw their valuations compress.

But that shift in short-term sentiment hasn’t changed the underlying business. And it certainly hasn’t changed the massive long-term opportunity that high-quality Canadian renewable energy stocks like Northland have.

It still operates a globally diversified portfolio of energy assets, with exposure to offshore wind, solar, battery storage, and more. And these are long-term infrastructure assets that generate relatively stable cash flow, often supported by contracts.

So even though the stock has been out of favour lately, the industry is still reliable and defensive long term, and demand for electricity isn’t just essential, it’s growing rapidly.

How cheap is the Canadian energy stock right now?

With Northland still out of favour, it trades at an enterprise value-to-earnings before interest, taxes, depreciation and amortization (EV/EBITDA) ratio of roughly 7.9 times today, well below its 5- and 10-year average forward EV/EBITDA multiples of about 11 and 12.5 times, respectively.

It also reset its dividend in late 2025, slashing it by 40%, to give itself more financial flexibility while major projects like Hai Long in Taiwan come online.

That’s important because while income is nice and Northland still offers a yield of 3.1%, there’s far more growth opportunity ahead, so lowering the dividend to retain more cash to invest in growth is a better use of capital in the near term.

Because this isn’t a short-term trade tied to oil prices or what’s happening in Iran. The war may have reminded investors how important energy infrastructure is, but Northland is ultimately a long-term business that’s being built to generate cash flow for decades.

And while Northland isn’t risk-free and still operates in a capital-intensive industry, and future growth will depend on execution and financing conditions, those risks are well understood and largely reflected in the valuation today.

So, with Northland trading at a bargain, still offering an attractive yield, and having years of growth ahead, it’s easily one of the best Canadian energy stocks to buy now.

The post The Canadian Energy Stock I’d Buy Right Now and It’s a Bargain appeared first on The Motley Fool Canada.

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More reading

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Fool contributor Daniel Da Costa has positions in Northland Power. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.