2 Oil Stocks to Avoid in Canada

Two prominent oil stocks could see their rallies end following news about steep losses due to hedging and the decision to sell renewable energy assets, respectively.

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Caution, careful

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Oil stocks’ dominance continues at the start of Q2 2022 as commodity prices remain elevated. The TSX is up 2.73% year to date on the strength of the energy (+36.2%), materials (+18.6%), and communication services (+11.36%) sectors. However, if you want to maintain or take new positions in the top-performing sector, avoid two oil stocks in the meantime.

Cenovus Energy (TSX:CVE)(NYSE:CVE) announced a potential realized loss of $970 million in Q1 2022 due to oil price hedging. Suncor Energy (TSX:SU)(NYSE:SU) could lose favour with investors following its decision to exit the renewable energy business, particularly wind and solar.

While both oil stocks outperform the broader index year to date, the latest developments could end their bull rallies. Fortunately, investors still have many prospects that should continue their upward momentum.

Steep losses ahead

Cenovus Energy is undoubtedly a momentum stock. The gain in the last 12 months is an astronomical 118.35%. Also, at $20.62 per share, the energy stock is up 33.17% year to date. Because of the favourable pricing environment and 71% year-over-year increase in production, management doubled its quarterly dividend in Q4 2021.

In the year ended December 31, 2021, net earnings reached $587 million compared to the $2.37 billion net loss in 2020. Notably, adjusted funds flow ballooned 6,095% to $7.24 billion. Last year was also the first year as a combined company. Cenovus acquired Husky Energy previously and the integration of the assets was successful.

On April 4, 2022, the $41.14 billion oil & gas integrated company announced the suspension of its crude oil hedging practice. Simultaneously, management warned of steep losses in Q1 2022. Many oil producers use a hedging strategy as protection against sudden price drops.

Management assures investors that because of its healthy balance sheet and strong liquidity position, Cenovus no longer needs to hedge. The immediate plan is to close the bulk of its outstanding crude oil price risk management positions over the next two months. Note that the current share price is down 4.7% since the hedging announcement.

Surprise exit  

Suncor Energy raised eyebrows when it announced the decision to divest its wind and solar assets on April 5, 2022. Management said the sale of the assets should bring more “fit and focus” to its portfolio. The $58.11 billion oil bellwether will instead focus on hydrogen and renewable fuels.

Mark Little, Suncor’s CEO, said, “By doing so, we use our strengths, competitive advantages, and resources to drive shareholder returns and value over the long term and help us meet our emissions reduction targets.” Suncor hopes to achieve net zero emissions by 2050.

Among the targeted activities is a partnership with ATCO Ltd. to build a hydrogen facility. The partners expect to make a final investment decision in 2024. Once complete, the facility could produce over 300,000 tons of clean hydrogen annually. Suncor will also focus on renewable fuel technologies and commits to building and operating a commercial production facility in North America.

Suncor lost its dividend aristocrat status in 2020 after slashing dividends by 55%. However, the yield (4.08%) is back to pre-pandemic levels in 2022. This energy stock trades at $40.60 per share and is winning 29.66% year to date.  

Material bearing

The latest news about Cenovus and Suncor could have a material bearing on the respective stocks. Their rallies could screech to a halt.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Christopher Liew has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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