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Oil Rally: 2 Energy Stocks to Consider This Summer

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Energy stocks have been a shaky bet this year, but there are positive signs as we get closer to the end of May.

The oil and gas price rout in early March stood as one of the early signs of trouble for the markets in 2020. Oil was forced to contend with several headwinds on top of the COVID-19 pandemic. A price war between Saudi Arabia and Russia threatened the stability of OPEC. Things deteriorated to the point where investors saw WTI crude and Western Canadian Select (WCS) prices move into negative territory.

Today, I want to discuss how energy stocks have been able to recover in the late spring. Investors may have missed the best buy-the-dip opportunity, but there are still attractive discounts in this sector. Let’s dive in.

Why energy stocks have bounced back in the spring

Oil prices have rebounded in the month of May. European and North American regions are beginning phases of re-opening. This means that demand should start to recover in the summer months. However, Canada’s energy sector is still facing major questions about its future.

Earlier this month, oil producers in Alberta said they were mostly satisfied with the federal government’s loan assistance program for large corporations. The federal government will offer “bridge loans” to any large company with annual revenues of $300 million or higher that cannot borrow by conventional means. Oil and gas companies will also be required to set environmental goals.

In late April, I’d focused on three energy stocks that had the potential to enjoy a sharp rebound. Below, I’d like to revisit one of those stocks and shed some light on another middle-tier energy stock worth attention.

Two stocks on the mend

Vermilion Energy (TSX:VET)(NYSE:VET) is engaged in full-cycle exploration and production programs that focus on the acquisition, development, and optimization of oil and gas producing properties in North America and around the world. Its shares have dropped 64% in 2020 as of close on May 25. However, the energy stock has increased 32% month over month.

Investors had to wave goodbye to Vermilion’s monster monthly dividend, at least for the time being. That does not mean that it cannot deliver some quick growth on the back of this rebound. In its Q1 2020 results, Vermilion reported fund flows from operations (FFO) of $170 million or $1.09 per share — down 21% from the prior quarter. Q1 production was down 1% from Q4 2019, while posting an increase in Canada.

The company is still in troubled waters due to the COVID-19 disruption. Meanwhile, the stock currently possesses a favourable price-to-book (P/B) value of 0.9.

Shawcor (TSX:SCL) is an Ontario-based provider of services that cater to the Pipeline and Pipe Services, and Petrochemical and Industrial segments of the energy industry. This energy stock has plunged 84% in 2020 so far. Shares have increased 13% week over week after its Q1 2020 earnings release.

Revenue in the first quarter fell 9% year over year to $319 million and it posted a net loss of $234.9 million. On the positive end, Shawcor saw its order backlog hit $575 million at March 31, 2020, which was higher than its $513 million backlog at December 31, 2019. The company expects that “the period of reduced demand and disruption will be a magnitude larger in the very near term” and “last for several quarters.”

Shawcor is the bigger risk of the two with a so-so balance sheet. However, its shares do boast a very favourable P/B value of 0.1.

On the topic of the stock market rally...

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Fool contributor Ambrose O'Callaghan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends ShawCor.

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