The Canadian oil sands are among the world’s largest sources of crude oil, presenting an intriguing investment opportunity for many in the face of lasting inflation and higher commodity prices.
For interested investors, the stock of choice is often Suncor Energy (TSX:SU), one of Canada’s largest energy companies, which plays a crucial role in the extraction and processing of these reserves.
However, investing in the oil sands, and particularly in Suncor, comes with its own set of benefits and challenges. Here’s my attempt at providing a broad overview of these pros and cons, along with an exchange-traded fund, or ETF alternative that I think provides better diversification for a Canadian oil and gas sector play.
The pros
The high-level advantages of investing in Suncor, as it relates to Canada’s oil sands, as I see them are as follows:
- Sizeable reserves: The oil sands in Alberta, where Suncor has extensive operations, are among the largest crude oil reserves globally. This means Suncor has access to a vast, long-term supply of oil, potentially securing its future revenue streams.
- Commodity supercycle: A commodity supercycle — a prolonged period when commodity prices remain above their long-term trend — could be triggered by economic recovery and growth, particularly in developing countries. If this happens, oil prices would rise significantly, providing a substantial boost to Suncor’s profits.
- Stable global energy demand: Despite the shift towards renewable energy, the global demand for oil currently remains substantial, especially as a result of the Russian-Ukraine war and ongoing sanctions. Suncor, as a major player, stands to benefit from this continued demand, making it an attractive investment opportunity.
The cons
That being said, there are also compelling reasons as to why Suncor may not be the best way to capitalize on growth in Canada’s oil sands:
- Environmental concerns: Oil sands extraction is notorious for its environmental impact, including high carbon emissions and water use. These concerns have led to increased regulations and public pressure on companies like Suncor, potentially affecting their operations and reputation.
- Volatile commodity prices: The revenue of companies like Suncor is heavily tied to the price of oil, which can be extremely volatile. This means that if oil prices plummet, as they did during the 2020 pandemic, Suncor’s profits — and hence its stock price — could take a significant hit.
- Transition to renewable energy: Despite the current demand for oil, long-term the world is expected to pivot towards cleaner energy sources, which may reduce demand for oil in the long term. If Suncor doesn’t successfully execute such a transition towards more sustainable energy sources, it might struggle in a post-oil world.
My ETF suggestion
I would not buy Suncor as a way to invest in Canada’s oil sands. At the end of a day, Suncor is just a single stock. I do not want to run the risk of management making a poor decision or its financial condition taking a hit. It’s simply too much risk for my personal tastes.
A more diversified approach would be a sector ETF like BMO Equal Weight Oil & Gas Index ETF (TSX:ZEO), which holds Suncor along with nine other leading Canadian oil and gas stocks in equal weights.
From my point of view, the decision of whether or not to invest in Canada’s oil sands requires top down analysis of the industry. With that in mind, why invest in a single company over a portfolio of companies? ZEO is the way to go, in my opinion.
