Energy stocks are currently out of favour. The S&P/TSX Capped Energy Index – the index of energy stocks trading on the TSX – is down 0.98% for the year, while the TSX as a whole is up. It’s been pretty weak performance. Which is why now is such an intriguing time to buy energy stocks. Stocks that are out of favour tend to rise again later, while stocks that are in favour tend to fall in the future. Just look at what happened with U.S. tech stocks in 2022 if you don’t believe me! In this article, I will explore three Canadian energy stocks that could be good buys in May 2023.
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Cenovus Energy
Cenovus Energy Inc (TSX: CVE) is a Canadian energy company that got beaten down along with its peers in the recent oil stock sell-off. CVE stock is relatively cheap, trading at a single digit P/E ratio, although its earnings are trending downward. In its most recent quarter, the company delivered negative cash from operations, and $1.3 billion in adjusted funds flow, a decrease of 41% year over year.
Can Cenovus turn it around?
Potentially, yes. The company extracts and sells oil, so the higher oil prices go, the better CVE will do as a business. Oil prices are currently at a level where countries will not drain their emergency oil reserves in order to suppress them, and OPEC (a major oil cartel) is cutting output. So, there is some reason to think that oil prices will rise from today’s level.
Suncor Energy
Suncor Energy Inc (TSX: SU) is another oil company. Like Cenovus, it is involved in extracting and selling crude oil. Unlike Cenovus, it still has a gas station business –Cenovus sold its gas stations after facing some pressure from activist investors.
In its most recent quarter, Suncor Energy delivered:
- $3 billion in funds from operations, down 25%.
- $1.8 billion in adjusted operating earnings, down 34%.
- $2 billion in net income, down 32.2%.
Suncor’s revenues and earnings both declined, but that’s not necessarily the biggest problem, as the company was trading at just five times earnings when all this happened. The company is still relatively cheap even if earnings go down 30% in each quarter of 2023.
Enbridge
Enbridge Inc (TSX: ENB) is a Canadian pipeline company that transports much of the crude oil that is consumed in North America. It also supplies 75% of Ontario’s natural gas. The company’s stock has a very high dividend yield.
One nice thing about Enbridge is that its earnings are not too dependent on high oil prices – at least not compared to those of other oil companies. What the company does is operate pipelines that oil gets pumped through to transmit it to its destination. It does not charge a “cut” of oil sales for this service, it simply charges its clients regular fees, similar to a landlord taking rent. This means that, unless an Enbridge client goes out of business, the company is unlikely to see a major hit to its revenue – even when oil prices are low and companies like Suncor and Cenovus are suffering. It also helps that the company is working on several major expansion projects that will help it transport more oil in total.
