Canadian oil stocks have been tumbling this year. For the year, the TSX energy index is down 1.9%, when the S&P 500 is up 8%. It’s been a period of significant underperformance for Canada’s biggest oil producers.
In times like these, it can be tempting for investors to throw in the towel. If you bought oil stocks in 2020 or even 2021, you’re likely still sitting on gains, but if you bought at the 2022 highs, you’re most likely in the red. It’s a painful experience, but is it really a good reason to call it quits?
Why oil stocks are falling
To understand why oil stocks are falling, you need to understand what’s happening with the products that oil companies sell. Most Canadian oil companies are involved in selling three products:
- Crude oil
- Gasoline
- Natural gas
All of these goods have been trending downward in price lately. Crude oil is currently $71, down from $123 at the 2022 peak. Gasoline prices have been declining across Canada for months. Natural gas is barely more than a quarter of its peak 2022 prices. Basically, all of the goods that oil companies sell are going down in price.
How long will this situation persist for? It’s hard to say. We know that the Organization of Petroleum Exporting Countries is cutting output, and the U.S. is now considering filling up its strategic petroleum reserve (SPR). These kinds of moves tend to support high oil prices. However, so much oil was drained from strategic reserves last year that it may take some time for the effects of supply curtailment to really be felt.
Recent earnings from two Canadian oil giants
To gauge the effect that falling oil prices are having on companies that sell oil, we can look at the first-quarter earnings released by Suncor Energy (TSX: SU) and Cenovus Energy (TSX: CVE) — two of Canada’s biggest oil producers.
In its most recent quarter, Suncor Energy delivered reasonably good results. It beat analyst estimates of revenue and EPS, boasting the following metrics:
- $3 billion in funds from operations, down 25%
- $1.809 billion in operating earnings, down 34.3%
- $2.05 billion in net income, down 30%
- $1 billion in cash from operations, down 66%
As you can see, all of the company’s earnings metrics declined in the first quarter. However, SU stock was trading at about five times earnings when its release came out, so it should remain fairly cheap, even if all future 2023 quarters look like the first quarter.
It’s a similar story with Cenovus Energy. In its most recent quarter, CVE delivered the following:
- $12.26 billion in revenue, down 24%
- $1.39 billion in adjusted funds flow, down 41%
- $294 million in free funds flow, down 73%
- $636 million in net income, down 19%
Overall, the results were not particularly impressive, but again, given CVE’s cheap valuation prior to the release coming out, they were not disastrous.
What Suncor’s and Cenovus’s earnings speak to is the potential for these stocks to do well if oil prices start rising again. Even at today’s oil prices, they are not overvalued. If we start seeing prices above $80, then these stocks could really get moving. Personally, I’m sitting out the oil trade for now, but I’d consider jumping back in if oil dipped below $65.
