Better Buy: Enbridge or Suncor Energy?

Suncor Energy (TSX:SU)(NYSE:SU) is a solid energy play, but Enbridge Inc (TSX:ENB)(NYSE:ENB) is less sensitive to oil prices.

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Suncor Energy (TSX:SU)(NYSE:SU) and Enbridge (TSX:ENB)(NYSE:ENB) are two of Canada’s most popular energy stocks. Boasting high dividend yields, “okay” growth, and solid profitability, they are both solid income plays. If you’re interested in energy stocks, then either one would be a decent buy.

With that said, the two companies are very different. Suncor Energy is an integrated energy company and, therefore, partially a bet on oil prices. Enbridge, however, is a pipeline company that makes money off transportation fees, making it more similar to a REIT or a railroad company than a conventional oil producer. In this article, I will explore cases for investing in Suncor and Enbridge to help you decide which one is the better buy.

The case for Enbridge

The case for Enbridge stock revolves largely around income potential. The stock has a 6.92% dividend yield at today’s prices, and the dividend is backed by $2.3 billion in quarterly distributable cash flow (DCF). Enbridge technically has a payout ratio above 100% based on GAAP earnings, but DCF is a better predictor of dividend-paying ability, because it doesn’t factor in non-cash gains and losses. The DCF payout ratio is usually around 70%, which indicates high dividend-paying ability. So, Enbridge is a pretty solid income play.

Unlike Suncor, its earnings don’t vary with oil prices too much. It is an energy company, but as a pipeline, it makes money off of transportation fees rather than direct oil sales. If oil prices go so low that companies shut down, that could affect its business, but on the whole, ENB is a pretty solid income earner that is less volatile than other energy stocks.

The case for Suncor Energy

The case for Suncor stock is pretty much the exact opposite of the case for Enbridge: it is extremely sensitive to oil price swings.

Suncor is an integrated energy company, meaning that it is involved in extracting, refining, and selling oil. It makes money off barrels of oil and gasoline sold at the pumps, so the higher oil prices go, the more money Suncor makes.

SU’s most recent quarter amply demonstrated this fact. In the third quarter, Suncor delivered the following:

  • $2.6 billion in funds from operations (FFO), up 160%
  • $1.04 billion in operating earnings, up from a $338 million loss
  • $877 million in net income, up from a $12 million loss

Those are pretty solid results, especially compared to the same quarter a year before. And as the price of oil rises, they will only get stronger. Another wave of COVID-19 or a supply shock could take the price of oil down temporarily, but it will only have a short-term effect. In the long run, the price of oil should climb as the economy re-opens. That will benefit Suncor immensely.

Foolish takeaway

While Suncor and Enbridge are both energy stocks, the similarities about end there. One makes money from transportation — the other, from oil sales. Overall, Enbridge is more reliable, while Suncor has more potential in a best-case scenario. Which is better is a matter of personal preference.

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 Andrew Button has no position in any of the stocks mentioned. The Motley Fool recommends Enbridge.

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