Canadian energy stocks have missed out on the rally in the TSX Index in 2019, which has contrarian investors wondering if this year’s dogs might become stars in 2020.
Let’s take a look at Suncor Energy (TSX:SU)(NYSE:SU) to see if it deserves to be on your buy list today.
Oil market
The price for Western Canadian Select (WCS) oil normally trades at a discount to West Texas Intermediate (WTI) and Brent. At the moment, WCS sells for close to US$40 per barrel, while WTI fetches US$60 and Brent Crude trades for US$65 per barrel.
The low Canadian prices are due to a lack of access to international markets as a result of pipeline shortages. In effect, the existing pipelines that move oil to the United States are full.
As a result, companies are using trains to get their oil to higher-priced markets, but this is a more expensive option.
The federal government is starting construction on the Trans Mountain expansion pipeline designed to carry oil from Alberta to the Pacific coast in British Columbia.
Legal battles are still in the works and could delay the ultimate completion of the project, but it will likely get done. The additional capacity would be just under 600,000 barrels per day.
Another large project, Keystone XL, has also faced years of delays caused by legal battles. Nonetheless, it’s slowing moving towards a possible completion and would transport up to 830,000 barrels per day.
In the event the two pipelines get built, Alberta’s oil sands producers would have access to better pricing and be able to ship more oil.
On the WTI and Brent situation, the prices have recently drifted higher on hopes that progress in the trade battle between the United States and China will avoid a global recession. As confidence in the global economy improves, oil prices should find additional support.
Should you buy Suncor stock?
Suncor Energy is Canada’s largest integrated energy company with businesses that occupy the full spectrum of the hydrocarbon value chain.
The oil sands and offshore oil production assets have vast resources to grow output from decades. In addition, Suncor owns four large refineries and operates about 1,500 Petro-Canada retail locations. These downstream businesses help offset margin compression when oil prices drop.
The company has a strong balance sheet and uses its financial firepower to make strategic acquisitions during difficult times. The added production drives cash flow higher as oil prices improve, helping to support dividend growth.
Suncor is one of the few energy stocks that has raised the dividend steadily over the past five years, despite the challenging times in the industry.
In fact, the dividend has increased for 17 straight years. The board hiked the quarterly distribution from $0.36 to $0.42 per share in 2019. Investor should see another generous jump in the payout in 2020.
At the time of writing the stock trades near $42 per share, providing a 4% dividend yield. The 2018 high was $55, so investors can pick up some big gains when the market improves.
The energy sector could see a nice rebound in 2020 and Suncor’s share price would certainly benefit. Otherwise, you get paid well to wait for better days.
If you have some cash for a contrarian pick in your TFSA or RRSP, Suncor might be a good choice heading into 2020.
