$0 Oil Prices: Is Suncor (TSX:SU) Done For?

With the drop in oil prices reaching remarkable lows, energy stocks like Suncor might be in trouble.

| More on:

Image source: Getty Images

Oil did something on Monday, April 20, 2020, that nobody was anticipating. The May contract for West Texas Intermediate crude on the New York Mercantile Exchange traded and closed in negative territory.

The energy trading on Monday morning also saw the price for Western Canadian Select – the benchmark price for heavy oil coming from Alberta’s oil sands – also take a slight dip in negative territory. Energy trading made history – but not in the way people want.

Energy sector operators like Suncor Energy (TSX:SU)(NYSE:SU) were paying customers for taking the crude oil off their hands.

The COVID-19 pandemic economic collapse is weighing down on North American oil as well. As I write this, West Texas Intermediate oil prices are around US$15.43 per barrel. It went low to around $10 per barrel as well. The prices have not been this low since 1986.

Despite what it may look like, Suncor is not in as bad a position as you might think.

Oil prices are not actually negative

Many investors are aware of the phenomenon called the short squeeze. In a short squeeze, traders are afraid that they might not be able to find the underlying physical commodity. The situation forces them to cover their positions and drives up the prices drastically.

What happened on Monday was effectively the opposite of a short squeeze. Traders were scrambling to get out amid fears that they will not be able to find a way to store the physical oil thanks to the havoc being caused by the pandemic.

The whole situation is bearish, nonetheless. However, it does not genuinely reflect the supply and demand fundamentals of the market.

Why Suncor might be all right

When we take a look at the future contracts, the current quote for Western Canadian Select, according to BNN Bloomberg, is more than US$8 per barrel. Canadian oil producers like Suncor might be getting $11.60 per barrel in local currency. While it’s not the best deal, it is certainly not in negative territory.

There is a massive oversupply of crude oil in the world right now, which renders it a challenge to consider rooting for an energy company in this situation. The fact that the price of this commodity is low may be the only way for the sector to overcome the oversupply issues. With prices so low, it could see smaller operators go bankrupt.

Canada’s oil production is through its oil sands and operates more like a mine than an oil well. The cost to set up operations costs billions of dollars. After set-up is complete, the cost of producing each barrel is comparatively nominal. Many oil drillers have shut down operations due to low oil prices and might not last long.

Suncor, on the other hand, can still plow through the current troubles. Suncor has an excellent balance sheet that can cover it during a challenging environment. When 2019 ended, Suncor had $4.7 billion in available credit and $2 billion in cash. The energy sector operator can take on more debt if it needs to stay afloat.

Suncor also possesses several downstream operations. Its oil refineries and Petro-Canada gas stations will have plenty of demand as the travelling resumes after the global health crisis subsides, and lockdowns are finally lifted.

Foolish takeaway

The headlines last week certainly rattled the minds of investors across the board, but I believe that it’s nothing more than a quirk in the market. While it might affect smaller operators in the sector, Suncor and other top energy sector operators can walk out of it partially unscathed.

Investing in shares of Suncor doesn’t come without risk. You do have to consider the fact that there is a massive oversupply problem right now. Energy operators do need the economy back up and running again.

Suncor might survive this storm, and it could be worth your while to consider the stock at a bargain price right now.

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 Adam Othman has no position in any of the stocks mentioned.

More on Dividend Stocks

Happy family father of mother and child daughter launch a kite on nature at sunset
Dividend Stocks

TFSA Investors: How to Max Out Before the New Year!

Investors should try and max out on their TFSA while they can. Here are ways to do that, plus an…

Read more »

grow dividends
Dividend Stocks

Growth or Passive Income? Get Both With This Top TSX Stock

This top TSX stock offers growth, income and protection during a potential recession. What's not to love?

Read more »

little girl in pilot costume playing and dreaming of flying over the sky
Dividend Stocks

3 Dividend Stocks to Gift Your Kids This Holiday Season

Parents, don't just focus on gifts that eventually end up in the trash. Give the gift of a solid financial…

Read more »

Golden crown on a red velvet background
Dividend Stocks

The Smartest Dividend Aristocrats to Buy With $500 Right Now

These three Dividend Aristocrats offer value but also huge passive income to lock in while prices still trade so low!

Read more »

protect, safe, trust
Dividend Stocks

3 Anchor Stocks for Steady Stability if There Is a Recession

If you consider dividends an important part of your total return, three industry leaders should be your anchor stocks.

Read more »

growing plant shoots on stacked coins
Dividend Stocks

TFSA Investors: 2 Dividend-Paying Mortgage Stocks to Boost Your Income in 2023

TFSA investors can allocate their new $6,500 contribution limits to two high-yield mortgage stocks to boost their tax-free incomes in…

Read more »

Arrowings ascending on a chalkboard
Dividend Stocks

3 TSX Stocks With Dividends That Outpace Inflation

Investors that worry about losing buying power due to inflation could put money into these three stocks! They’re known for…

Read more »

edit Businessman using calculator next to laptop
Dividend Stocks

Dividend Seekers: Which of These 3 TSX Energy Stocks Is a Better Buy?

Which is a better bet among TSX energy bigwigs?

Read more »