The 2020 market crash hit the energy sector harder than most other industries.
However, the recent force has led investors against the tide to wonder if this is not the right time to buy oversold producers or energy infrastructure companies.
West Texas Intermediate (WTI) oil traded for $ 63 a barrel in January shortly after the United States killed one of Iran’s top military leaders. The main concern at this point was the threat of war in the Middle East.
The emergence of the coronavirus in China has changed the orientation of government leaders and energy traders. Oil initially slipped out of fear that the economic slowdown in China will hit demand there. With the spread of the epidemic, global economic activity is slowing and international demand for oil is down 25%.
To make matters worse, Russia and Saudi Arabia have ended their supply-limiting pact. A price war has broken out, production increasing as demand plummets. This led WTI oil to a recent low close to US $ 20 per barrel.
Talking about a potential truce helped push up oil prices late last week. At the time of this writing, oil is falling further and is trading at US $ 26.
Let’s take a look at the two giants of the energy sector.
If Russia and Saudi Arabia announce a new deal to drastically cut oil supplies, the price of oil could easily go up to US $ 35-40. This would shake short sellers and bring bargain hunters into the area. Suncor was trading at $ 41 in early February, so a jump to $ 30 – $ 35 wouldn’t be a surprise in this scenario.
However, it is possible that the OPEC + disagreement may continue. Even if an agreement emerges, the market could react negatively if the size of the cut is not substantial. Analysts say global storage capacity is close to 100%, and some experts see WTI oil as low as US $ 10 before the pain takes more drastic measures.
Suncor’s downstream assets also deserve consideration. Refinery and retail operations normally provide decent hedging against falling oil prices. This is not currently the case, as demand for fuel has fallen off a cliff in recent weeks. Planes are grounded, commercial trucks sit in parking lots and consumers work from home.
On the production side, Suncor and its partners plan to close the large Fort Hills project.
Enbridge does not produce oil. He simply carries the product and charges a fee to provide the service.
Liquid side revenues from pipeline activities are primarily from long-term contracts. Natural gas distribution activities operate in regulated environments. These tend to be relatively resistant to the recession. Businesses and homeowners still need natural gas to generate electricity, keep buildings warm, heat water or cook food.
Management has streamlined Enbridge in recent years and monetized nearly $ 8 billion in non-core assets to consolidate the balance sheet. The $ 11 billion guaranteed capital program is expected to support growth in distributable cash flow over the medium term. Therefore, the existing dividend should be secure.
Suncor and Enbridge both seem oversold and could generate big gains for buy and hold investors.
That said, I would probably make Enbridge the first choice right now. The dividend provides a similar return to Suncor and is supported by a more reliable revenue stream in the current environment.
Aftermarket crash: Are Suncor Energy (TSX: SU) or Enbridge (TSX: ENB) stocks an immediate purchase? first appeared on The Motley Fool Canada.
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