Should You Buy Enbridge Stock or Suncor Stock Now?

The energy sector still looks cheap, as we see the light at the end of the pandemic tunnel. Is Enbridge stock or Suncor stock a better bet right now?

| More on:
energy industry

Image source: Getty Images

Enbridge (TSX:ENB)(NYSE:ENB) and Suncor (TSX:SU)(NYSE:SU) took big hits through much of 2020, but the energy sector is on the mend. Is Suncor stock or Enbridge stock a better pick right now?

Enbridge stock appeals to income investors

Enbridge rose from $36 in early November to a recent high of $45 per share. Even after the nice rebound, Enbridge stock still trades well below the $57 mark it hit before the pandemic last winter and currently offers investors a 7.5% dividend yield.

Enbridge raised its payout last fall, and investors should see the distribution increase by 5-7% per year, which is in line with anticipated growth in distributable cash flow. The revenue gains should come from a steady portfolio of capital projects and strategic acquisitions. Enbridge is a giant in the energy infrastructure industry and has the financial clout to do deals that complement the existing assets.

The oil pipelines should return to capacity, as fuel demand increases through the back half of the year. In the meantime, Enbridge’s natural gas transmission, storage and distribution assets continue to deliver steady and reliable cash flow. Investors could also see an expansion of the renewables business, which includes solar, wind, and geothermal assets.

The stock appears cheap right now, and income investors can pick up a great return with more dividend increases on the horizon.

Is Suncor stock oversold?

Suncor trades near $23 per share compared to $45 last January. The share price rallied over the past two months on a rising oil price, driven by positive vaccine news and supply controls. Investors expect lockdowns to ease once vaccines become widely distributed. That should result in people driving back to the office and planes getting back in service.

Oil surged from US$37 per barrel in the fall to the current price around US$53. That’s high enough for Suncor’s production assets to make decent margins. The company’s 2021 production guidance indicates an anticipated 10% increase in output in 2021. Cash operating costs in the oil sands group will drop about 8% to $26-$28.50 per barrel. Improved oil prices and better refining margins should help cash flow bounce back. As a result, Suncor expects to reduce debt by as much as $1 billion in 2021.

Suncor was a dividend star for several years. It raised the payout during the Great Recession and through the oil rout that began in 2014. Unfortunately, the pandemic’s impact on fuel demand put too much pressure on both the production and downstream operations, forcing the board the slash the distribution by 55% last year.

A return to dividend growth might occur by the end of 2021, but it will be a few years before the payout gets back to the previous level.

In its January oil market report, The IEA expects oil demand to recover by 5.5 million barrels per day in 2021. Global gasoline and diesel fuel demand should recover to near 2019 levels by the end of the year. That’s good news for Suncor’s refining and retail operations.

New lockdowns in China, Europe, Canada, and parts of the United States will slow the recovery in oil demand through the first part of 2021. This means the recent rally in oil prices could reverse. A sharp pullback would likely hit Suncor’s stock price, and a drop back to $20 wouldn’t be a surprise.

Should Enbridge or Suncor be on your buy list today?

Enbridge and Suncor both appear cheap right now and should deliver strong gains over the medium term. Enbridge provides a better dividend yield, while Suncor likely offers better upside torque on a recovery in the oil market.

Given the near-term risks, I would probably make Enbridge the first choice today and hope for a better entry point in Suncor stock over the coming weeks.

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.

The Motley Fool owns shares of and recommends Enbridge. Fool contributor Andrew Walker owns shares of Enbridge.

More on Energy Stocks

Group of industrial workers in a refinery - oil processing equipment and machinery
Dividend Stocks

2 Top Canadian Energy Stocks to Buy Right Now

Blue-chip TSX stocks like these two Canadian energy sector giants can help you generate substantial long-term wealth growth.

Read more »

A solar cell panel generates power in a country mountain landscape.
Energy Stocks

2 Revolutionary Canadian Clean Energy Stocks to Power Your Portfolio

Going green is the energy industry’s future. Here are two Canadian energy stocks to own to become part of the…

Read more »

A worker overlooks an oil refinery plant.
Energy Stocks

Energy Sector Rebound: Is Suncor Stock a Buy Today? 

After the OPEC oil cut, oil prices are rising again. Is this a rebound in energy stocks? Is Suncor stock…

Read more »

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

The U.S. Stocks Every Canadian Investor Needs to Know About

Boeing, UGI Corporation, and Exxon Mobil are three U.S. stocks I'd buy today.

Read more »

Silhouette of businessman sit on chair and hold a cigar and looking at the city in night.
Energy Stocks

Passive Income: How to Make $104 Per Month Tax Free in 20 Years

By simply choosing the right stock, and investing in it on a consistent basis, you can create massive passive income…

Read more »

A worker overlooks an oil refinery plant.
Energy Stocks

Where to Invest in Oil Stocks in June 2023

Suncor Energy is a Canadian oil stock that's set up to benefit from strong oil prices, as it trades at…

Read more »

edit Sale sign, value, discount
Energy Stocks

Buy Alert: Major Canadian Energy Stocks Are on Sale in June 2023 

Did you hear of a June sale? Well, Canadian energy stocks are trading near their lows in June 2023. It's…

Read more »

Dollar symbol and Canadian flag on keyboard
Energy Stocks

Canadian Blue-Chip Stocks: The Best of the Best for June 2023

TSX blue-chip stocks such as Enbridge can help you generate steady gains and benefit from a high dividend yield in…

Read more »