Suncor (TSX:SU)(NYSE:SU) and Enbridge (TSX:ENB)(NYSE:ENB) both took a beating last year. A recovery in the energy sector now has investors wondering if this is the right time to buy Suncor or Enbridge stock.
Is Suncor stock now a buy?
Suncor cut its dividend by 55% at the beginning of the pandemic. The move shocked long-time investors that relied on steady dividend growth from Canada’s largest integrated energy company. In past downturns, Suncor managed to maintain or boost the payout, but the pandemic is a unique situation.
Suncor’s downstream refining and retail businesses historically provided a hedge against falling oil prices, as oversupply normally caused the dip, not fuel demand. This time, oil prices tanked due to demand destruction. Countries around the globe went into lockdown. Airlines cancelled tens of thousands of flights and commuters stayed home. That situation remains in place, and it will be months before travel restrictions begin to ease and office workers return to their desks.
That said, the rally in the price of oil has already outstripped most predictions for 2021. This should boost Suncor’s margins on the production side and help the company meet or exceed its debt-reduction goals for the year. Once COVID-19 vaccines become available to the broader public, fuel demand should improve.
Suncor trades near $26 per share at the time of writing. At this price, investors get a 3.2% dividend yield. WTI oil is holding its gains near US$60 per barrel. Analysts are now floating US$75 as a target price for oil in the coming months. When oil sat above US$60 early last year, Suncor traded for more than $40 per share.
The IEA predicts global gasoline and diesel fuel demand will recover to near 2019 levels by the end of 2021. This would help Suncor’s downstream operations.
If you think oil is going to hold or extend its gains, Suncor stock looks cheap.
Why Enbridge stock appears oversold
Enbridge isn’t an oil producer. The company simply moves the crude from the production site to refineries or other customers. Throughput on Enbridge’s extensive oil pipelines typically runs near capacity. The drop last year hit revenue on this side of the business, but the situation should normalize by 2022.
Enbridge moves 25% of the oil produced in Canada and the United States. The company’s infrastructure is critical to the economy. New major pipeline projects might never be built. That hurts Enbridge’s growth prospects, but also makes the existing assets more valuable.
During 2020, Enbridge’s renewable energy, natural gas transmission, natural gas storage, and natural gas distribution businesses performed well. This allowed the board to raise the dividend in a challenging year. The distribution hike put to bed concerns that Enbridge might be forced to trim the generous payout. Dividend growth should continue in line with anticipated gains in distributable cash flow.
The stock trades near $44 per share compared to $56 before the pandemic. Investors who buy the stock now can pick up a 7.5% dividend yield and simply wait for the stock to move higher.
The bottom line
Suncor and Enbridge stock both look like good buys at current levels.
Suncor likely has more upside torque on higher oil prices, but I would probably make Enbridge the first choice today. The dividend yield is fantastic, and the stock should drift higher over the next couple of years.
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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 has no position in the companies mentioned.