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After Tech, TSX Energy Stocks Join the Sell-Off: What Should Investors Do?

Oil pumps against sunset
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TSX energy stocks have contributed to pulling the broader markets lower recently. In fact, some of the energy giants have fallen so badly since last week that their impact outweighed that of tech titans.

The country’s biggest integrated energy giant, Suncor Energy (TSX:SU)(NYSE:SU) stock, has fallen more than 12% since last week. Canadian Natural Resources (TSX:CNQ)(NYSE:CNQ) has also fallen more than 10% in the last week. There was a heavy sell-off in these top energy names, backed by more than double the usual trading volume.

Energy markets look weak

Energy stocks have been far too quiet for the last few months. Crude oil prices tumbled more than 6% on September 8 and fell close to three-month lows. Oil prices exhibited some of the strongest recoveries on record when they soared from negative levels in April to $40 per barrel in June.

However, pandemic worries have yet again put their ugly heads out, and energy markets might turn weak again.

The lower oil demand driven by the pandemic was partially offset by OPEC’s production cut during the second quarter. OPEC leader Saudi Arabia reduced Arab light crude oil prices by larger-than-expected amounts for Asian and U.S. buyers. The lower sale price indicates that the demand is still an issue for the top oil producer.

The second wave of the virus outbreak could further delay the economic recovery and might weigh on crude oil demand. Top crude oil importers like the U.S. and India are seeing an acceleration of the active coronavirus cases recently, which also should bother energy markets.

TSX energy stocks on a decline

Suncor Energy stock is trading close to $18 per share and fast approaching its pandemic lows that it hit in March. Apart from the lower oil prices, its lower production guidance for 2020 also weighed on the stock.

In my view, Suncor Energy stock looks discounted from the valuation perspective and could attract bargain hunters. It is currently trading at a dividend yield of 4%, higher than TSX stocks at large.

Importantly, Warren Buffett-led Berkshire Hathaway increased its stake in Suncor in Q2 2020. Suncor has fallen below its Q2 levels at large after the recent sell-off and might attract the Oracle of Omaha again.

Suncor Energy seems well placed to make a strong comeback with its substantial refineries and downstream operations. It operates more than 1,500 retail and wholesale fuel outlets in North America. Once the pandemic subsides and business activities stabilize, Suncor’s integrated operations will likely boost its financials.

Canadian Natural Resources is one of the top-yielding stock among TSX energy stocks. It offers a secured yield of 6.6%. A dividend cut seems unlikely given its strong balance sheet and relatively higher cash flows.

Its production increased in Q2 2020, and the trend will likely continue for the second half of the year. Canadian Natural’s breakeven price is around US$30-US$31 per barrel, making it stand tall, even in this low-oil-price situation.

Bottom line

I agree that crude oil price volatility has made energy stocks unpredictable in the last few years. However, Canadian Natural and Suncor Energy are some of the better names in the Canadian energy sector. Near-term challenges might weigh on them, but their dividends and post-pandemic recovery prospects make them noteworthy.

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 Vineet Kulkarni has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) 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 September 2020 $200 calls on Berkshire Hathaway (B shares).

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