Market Rally: 3 Energy Stocks That Can Explode This Year

Oversupply has killed oil producers, but there may be light at the end of the tunnel for energy stocks like Suncor Energy Inc. (TSX:SU)(NYSE:SU) this year.

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The S&P/TSX Composite Index was up 70 points in early afternoon trading on April 24. It has extended its rally from early April, but not all sectors have received a bump. Energy stocks have been punished over the last several weeks. The price of WTI crude and Western Canadian Select (WCS) moved into negative territory early this past week. However, Canadian energy stocks managed to hold firm.

Oil prices have bounced back since falling into negative territory. Like with other sectors, the fate of energy producers will hang on the handling of the COVID-19 lockdowns. The sector is relying on a return to normalcy, which would in turn see an increase in overall demand.

Today, I want to look at three TSX energy stocks that offer big dividends. These equities look undervalued, even in this choppy market.

Energy stocks to consider before May

Cenovus Energy (TSX:CVE)(NYSE:CVE) is a Calgary-based integrated oil company. Its stock has dropped 66% in 2020 at the time of this writing. However, shares had surged 86% month over month.

The company is expected to release its first-quarter earnings on April 29. Many analysts are projecting a dip in its performance. However, its fundamentals are still promising.

Cenovus stock currently possesses a very favourable price-to-earnings ratio (P/E) of 2.3 and a price-to-book (P/B) value of 0.2. Unfortunately for income investors, Cenovus halted its dividend payout in early April, as it wrestled with this crisis. Cenovus boasts a fantastic balance sheet, and its stock still looks undervalued today.

Vermilion (TSX:VET)(NYSE:VET) is another Calgary-based oil and gas producer. Similarly, Vermilion stock has dropped 70% in 2020 so far. Shares have climbed 88% over the past month. Like Cenovus, Vermilion halted its hefty dividend payment in response to this unfolding crisis.

This company is a bigger risk for investors this spring. It has a questionable track record, and absent its sky-high dividend, it does not have the upside of some of the other players in this space. Like other top energy stocks, Vermilion’s valuation is going to be highly reliant on the fluctuations in spot oil prices going forward.

Shares of Vermilion last possessed a P/E ratio of 24 and a P/B value of 0.3. Vermilion still looks undervalued in late April. Investors who are hungry for its previous income offering may have to wait awhile before we see a return to normalcy.

One Warren Buffett-approved stock to watch

Earlier this month, I’d discussed a top energy stock that Warren Buffett had given his stamp of approval.  Suncor (TSX:SU)(NYSE:SU) is still one of the biggest players in the Canadian oil and gas space. Its shares have dropped 47% in 2020 so far, but the stock has managed to rise 43% in the past month.

Unlike other energy stocks, Suncor’s business is structured to withstand a sustained drop in oil prices. Negative prices spooked investors earlier this week, but future contracts have oil prices above the $10 range. This is not good news for Suncor or its peers, but it is high enough to avoid complete disaster.

Suncor stock has an opportunity to explode as pent-up demand erupts when the lockdowns are finally lifted. Its shares boast a favourable P/E ratio of 11 and a P/B value of 0.8. Moreover, this energy stock has managed to maintain its tasty dividend. It last paid out a quarterly distribution of $0.465 per share, which represents an 8.4% yield.

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 Ambrose O'Callaghan has no position in any of the stocks mentioned.

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