The COVID-19 pandemic has impacted several industries due to nation-wide lockdowns and closures of businesses. Airlines and energy stocks have been the worst hit in this sell-off. World travel has come to a standstill, driving shares of airline stocks lower. Energy stocks have been decimated due to the oil price war between Saudi Arabia and Russia as well as lower demand due to the global lockdowns.
But this decline in stock prices provides investors an opportunity to create massive wealth. It is impossible to time the markets, and every pullback should be viewed as an investment opportunity. The current prices have made crude production unsustainable, which has led to a truce between Saudi Arabia and Russia.
This should stabilize oil prices, and energy stocks can move higher once the COVID-19 pandemic is brought under control. So, are energy stocks attractive options for TFSA investors who have a contribution room of $6,000 this year?
A Warren Buffett bet
TFSA investors can look to buy Canada’s integrated energy infrastructure giant: Suncor Energy (TSX:SU)(NYSE:SU). Suncor has a robust business model that provides insulation against lower oil prices. The stock is currently trading at $22.68, which is 50% below its 52-week high of $46. However, since March 18, Suncor shares have gained over 60%.
So, what makes this energy giant a reliable energy company in the current environment? Suncor has reduced its capital expenditures by 26% to $1.5 billion in 2020 due to lower demand in Canada. It partially shut its Fort Hills oil sands mine and revised production outlook for this year.
Suncor’s downstream operations should help the energy giant ensure a steady stream of cash flows. While it will struggle to improve the bottom line due to lower prices, Suncor’s reducing operating costs will offset the same.
Suncor has a market cap of $34.6 billion and a forward yield of 8.2%, which makes it an attractive bet for income investors. Warren Buffett’s Berkshire Hathaway owns 15 million shares of Suncor Energy, which should further boost investor confidence.
Another top energy stock in the TSX is Pembina Pipeline (TSX:PPL)(NYSE:PBA). This transportation and midstream service provider is not a pure-play energy company. Pembina owns an integrated system of pipelines and transports several products, including natural gas and hydrocarbons.
Pembina has a strong balance sheet with a net asset-to-sales ratio of 3.93 and net debt-to-EBITDA ratio of 4.1. Comparatively, energy giant Enbridge has a net debt-to-EBITDA ratio of 5.4 and net asset-to-sales ratio of 3.93.
Pembina pays annual dividends of $2.52 per share, indicating a forward yield of 9.1%. The company has increased dividend payments for four consecutive years, and in the last three years, annual dividend growth stands at 6.2%.
Around 85% of Pembina’s adjusted EBITDA is protected by long-term contracts, which makes a dividend cut unlikely and insulates the firm from lower commodity prices. Similar to Suncor, Pembina also reduced its capital expenditure program by 40% in 2020.
Investing a total of $6,000 in Suncor and Pembina will result in annual dividend payments of $520.
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.
The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool recommends PEMBINA PIPELINE CORPORATION and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short June 2020 $205 calls on Berkshire Hathaway (B shares). Fool contributor Aditya Raghunath has no position in any of the stocks mentioned.