TSX energy stocks have seen quite a reversal of fortune over the past few weeks, thanks in part to mounting recession fears and plunging energy prices. Now, it’s hard to gauge what oil’s next move will be, given that Russian sanctions are unlikely to go anywhere, at least not anytime soon. Further, the market may be too fearful of a 2023 recession. If one doesn’t arrive, oil could easily stay elevated for a longer duration. That could mean record cash flows for many of the energy producers that still have not been priced for a “higher for longer” oil price environment.
Though US$100 per barrel is unlikely to hold as the economy begins to show more evidence of slipping at the hands of Bank of Canada rate hikes, I think the recent selloff in Canadian energy stocks is more than buyable for those with a long-term time horizon.
Energy stocks slip into a bear market
Right now, it’s a tug-of-war between the bulls and bears. The bears seem to have a slight advantage, with many oil stocks in a bear market. Going into the second half, though, the magnitude of risk seems lower now than many have reset their expectations with the fierce energy rally. Even with oil at US$80-90, many Canadian energy companies will be profoundly profitable.
Two years ago, when oil crashed into the abyss, market fears over an oil price tumble to US$100 would have been unheard of. Though the magnitude of the decline in oil has been rough, it’s noteworthy that oil is still near historic highs. And they could have another leg higher if we are not in for the recession that some bears think we’re in for.
Yes, recession risks are high. However, it’s not guaranteed that we’re bound to fall into a recession in 2023. While many pundits think the odds are increasing, many view the coming recession as far milder in nature than something like the one endured in 2008.
While this could still entail further downside and a more U-shaped recovery off the market bottom, I still think that TFSA investors should not ignore the 21% plunge that the S&P 500 has already suffered in the first half of 2022.
Warren Buffett’s oil bets should not go unnoticed
While certain pundits think oil is destined for a tumble to US$65 per barrel over the next 18 months, I’d argue that Warren Buffett’s big oil bets are a sign that energy plays may actually be cheap. Even assuming a plunge to US$80 per barrel, certain energy stocks are still able to rake in the cash flows.
Currently, I like Suncor Energy (TSX:SU)(NYSE:SU) and Cenovus Energy (TSX:CVE)(NYSE:CVE) after their pullbacks.
Suncor and Cenovus stocks are off 26% and 31%, respectively, from their all-time highs. Though Cenovus faces more downside in a worsening of the energy selloff, I’d argue that it’s a great bet for those who aren’t ruling out US$150 oil. Cenovus’s oil-price sensitivity worked against it for many years. With oil at these heights, it could be a major plus for those who think the days of higher oil prices are here to stay. The Ukraine-Russia crisis could easily keep energy prices elevated.
For those seeking deeper value and less downside in a further retreat in oil, Suncor stock seems like a wise bet. Shares are still sensitive to oil fluctuations. However, the stock’s hefty discount (9.2 times trailing earnings) implies a relative margin of safety. The 4.74% dividend yield is also able to help energy investors dampen the downside in the Albertan oil patch.
