The Motley Fool

Warning! Don’t Expect Oil Stocks to Recover Anytime Soon

Image source: Getty Images.

If you think the worst is over for oil and energy companies, think again. According to a report by IEA (International Energy Agency), it might take several years for oil demand to normalize in a post-COVID-19 world.

IEA said if the pandemic is contained in 2021, oil demand will not reach pre-COVID-19 levels anytime before 2023. If the pandemic lingers on, the IEA has forecast global GDP will not recover to pre-COVID-19 levels until 2023, while global energy demand will normalize only by 2025.

It also said that oil consumption is expected to decline by 8%, while investments in the energy sector might fall as much as 18% in 2020. Over the long term, oil demand will continue to be impacted by the transition to electric vehicles and cleaner forms of energy.

The energy sector has been decimated due to COVID-19, and Deloitte published a report this week where it estimates over 107,000 jobs have been lost in the oil and gas sector in the U.S. this year. The energy industry continues to grapple with oversupply issues, price wars, and lower-than-expected demand.

Oil prices need to rebound to US$55/barrel, after which 76% of the lost jobs can be reinstated, claims Deloitte. The outlook for oil companies looks grim, and we could witness a decade where oil demand is lowest since the 1930s.

What’s next for stocks such as Canadian Natural Resources?

The report from IEA will make investors nervous, and rightly so. Is it time to dump oil stocks and exit the space? Well, there are companies such as Canadian Natural Resources (TSX:CNQ)(NYSE:CNQ) that have already lost significant value in 2020, and the weak outlook may have been priced in.

Canadian Natural Resources stock is trading at $23.65, which is 44% below its 52-week high. The stock has, however, gained 140% since touching a multi-year low of $9.8 in March.

CNQ is one of the largest oil producers in Canada and reported revenue of $2.87 billion in the June quarter with a net loss of $310 million. This represents a 49% drop in sales compared with revenue of $5.6 billion in the prior-year period. CNQ’s net income also stood at $2.8 billion in Q2 of 2019.

Despite the ongoing weakness in oil prices, CNQ increased its dividends by 13% in March. It was the company’s 20th consecutive year of dividend increases, and it has increased payouts at an enviable annual rate of 20% in the last two decades.

Currently, the stock has a forward dividend yield of 7.2%, which means a $10,000 investment in CNQ will generate $720 in annual dividend payments.

Canadian Natural Resources expects its low-cost structure to help it navigate a volatile and sluggish price environment. It said U.S. crude prices should be over $31/barrel for the company to break even. With crude oil hovering around US$40/barrel, we can see that CNQ might report much better results in the second half of 2020.

The Foolish takeaway

CNQ’s investment-grade balance sheet, robust liquidity position, and an expected increase in its cash flow makes the stock a top contrarian bet among energy companies.

Speaking of undervalued dividend stocks...

Just Released! 5 Stocks Under $49 (FREE REPORT)

Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share.
Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.
Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your FREE 5-stock report now!

Fool contributor Aditya Raghunath has no position in any of the stocks mentioned.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.