Oil Below $0: Should You SELL Canadian Energy Stocks?

With oil prices turning negative, are energy stocks like Enbridge Inc (TSX:ENB)(NYSE:ENB) buys?

| More on:

Image source: Getty Images

Yesterday, crude oil prices turned negative, as West Texas Intermediate (WTI) futures for May delivery fell as low as $-37 a barrel. The negative prices were due to crude oil accumulation at storage facilities. With storage tanks reaching maximum capacity, it became costly to physically store oil; as a result, sellers were effectively paying buyers to take their oil from them.

Recently, Gizmodo reported that oil companies were storing barrels of oil at sea at phenomenal expense. The accumulation was due to tanking global demand for oil, with air travel and other energy-intensive industries virtually shut down in the wake of COVID-19.

While yesterday’s negative oil prices were mainly seen in WTI crude, there were reports of Canadian crude turning negative as well. For example, Forex Live reported than Edmonton C5 oil was selling for as little as $-4.68 per barrel.

It goes without saying that none of this is good news for the Canadian oil & gas industry.

The question is, should you sell your oil & gas stocks now, or hold on for a recovery?

Unprofitable to extract crude

The most crucial thing to be aware of is that with oil prices in the minus territory, t’s not profitable to extract and sell crude oil. According to a recent Financial Post article, tar sands companies need $55 WTI to break even. At typical discounts, that would mean about a $40 price for Western Canadian Select.

According to Oil Price, Western Canadian Select is currently going for $5 a barrel — nowhere near the breakeven price. As a result, even integrated companies like Suncor Energy that sell directly to consumers will struggle to generate profits in this environment.

Significant exports to the U.S. unlikely

The truly alarming implication of negative oil prices in the U.S. is the effect on midstream companies. Typically, midstream pipeline companies like Enbridge Inc (TSX:ENB)(NYSE:ENB) are less sensitive to oil prices than extraction companies.

The reason is that they make money off of shipping fees rather than direct oil sales. However, these companies can’t make money if oil isn’t being shipped. And right now, it’s going to be hard to convince any American buyers to purchase Canadian crude.

As mentioned, the reason American oil prices are turning negative is because oil is accumulating in storage. With demand down, producers have pumped more oil than customers need, and large reserves of oil are going unused. Amid this environment, the U.S. won’t be importing much crude oil.

This is bad news for companies like Enbridge.

ENB’s pipeline stretches all over North America, with much of its shipments going to the U.S. Midwest. With demand way down, oil exports to those states will fall. This hits Enbridge in the pocketbook, because less oil shipments mean less shipping fees.

The company also has to contend with Canadian oil producers shutting down operations. According to Oil & Gas Middle East, Canadian oil companies have shut down 1.14 million barrels worth of daily production.

That means less oil to ship, and again, less business for Enbridge. If this situation persists, it will be bad news for ENB shareholders.

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 Andrew Button has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Enbridge.

More on Dividend Stocks

worry concern
Dividend Stocks

Worried About a Recession? 2 Canadian Blue-Chip Stocks to Buy and Hold for Dear Life

A recession is worrisome. Buying two blue-chip TSX stocks and holding them for the long term will deliver stable, less…

Read more »

money cash dividends
Dividend Stocks

TFSA: 3 of the Best Canadian Dividend Stocks to Buy This Year

Are you looking for some of the best Canadian Dividend stocks to buy this year? Here are three great options…

Read more »

Man data analyze
Dividend Stocks

2 Recession-Tough Stocks to Buy in February 2023

TSX stocks, such as Jamieson Wellness, are trading at compelling valuations and might deliver stellar gains to investors.

Read more »

A worker overlooks an oil refinery plant.
Dividend Stocks

Defensive Investors: 3 Stocks to Shore Up Your Portfolio

Fortis is a defensive stock with an impressive track record.

Read more »

edit Woman calculating figures next to a laptop
Dividend Stocks

Passive Income: 2 Cheap Stocks to Buy and Never Sell

Buying dividend stocks cheap and discounted is a strategy many value investors pursue to maximize the return potential.

Read more »

Female friends enjoying their dessert together at a mall
Dividend Stocks

Dividend Stocks: Will Debt Load Put a Damper on This Top Stock in 2023?

This dividend stock has a very solid track record of revenue and cash flow growth, ,as well as dividend growth,…

Read more »

A plant grows from coins.
Dividend Stocks

How to Invest in One of the Most Important Commodities in the World (It’s Not Gold)

Many things we take for granted may offer economic value and a powerful investment opportunity beyond commodities like gold or…

Read more »

growing plant shoots on stacked coins
Dividend Stocks

Need Passive Income? Turn $15,000 Into $1,016 Annually With These 2 Dividend Stocks

Canadian investors with limited capital can create passive-income streams from two high-yield dividend stocks.

Read more »