Oil stocks are starting to get interesting again. After running up too much in 2022, oil stocks have come down to a level where they might be worth buying. At last year’s highs, oil stocks were overpriced, as they remained at high levels, despite oil prices falling. Today, these shares are at much lower prices, consistent with the oil prices we’re seeing today. As a result, these stocks are starting to get interesting again for the first time since early 2022.
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Oil prices hit 2021 levels
One of the reasons why oil stocks have gotten cheaper is because oil prices have fallen to levels not seen since 2021. On Monday, West Texas Intermediate crude oil was all the way down at US$66. It has been a long time since we’ve seen that price level. Naturally, oil stocks fell in tandem with oil when the $66 level was breached.
Why am I describing this fall in the oil price as a good thing? Because it might not last. We saw oil futures prices turn negative during the COVID-19 lockdown period, yet that quickly reversed. We could see a similar thing in the future. Central banks are raising interest rates, which is slowing economic activity, but at the same time, OPEC (an oil cartel) is cutting output and China is finally re-opening after years of COVID lockdowns. The fundamentals are there for higher oil prices in the future.
Which oil stocks are buys here?
If you’re looking for good oil stocks to buy in order to take advantage of another uptick in oil prices, I’d recommend exploration/production companies like Suncor (TSX:SU) and Cenovus (TSX:CVE). These stocks make money by selling oil and gas directly, so they’re more exposed to oil prices than an infrastructure company like Enbridge.
Suncor is an oil stock I held a few times last year. On both occasions when I held it, I didn’t hold for very long. I profited off both trades. The reason I bought Suncor was because it was cheap, trading at five times earnings. It’s still cheap now, currently trading at six times earnings, 0.94 times sales, and 1.24 times book value (book value means assets minus liabilities). The current low oil prices will result in Suncor’s earnings falling this year compared to last year. However, earnings might not fall as much as people think: Suncor paid off a lot of debt last year, which helps on the cost side.
It’s a similar situation with Cenovus. Cenovus is a company that extracts and sells crude oil, much like Suncor. It used to operate gas stations, but it sold that business. Suncor is still in the gas station business. CVE is a little pricier than Suncor, trading at 6.5 times earnings. It looks like Suncor has the better valuation here, but CVE might be less risky than SU.
Suncor was involved in some scandals involving workplace safety incidents last year. It also persists in owning gas stations, when many big investors question the ethics of running gas stations. Cenovus Energy doesn’t have the public relations issues that Suncor has, so it might be a safer bet, justifying the higher price tag.
