The Canadian dollar is looking pretty weak. But unfortunately, it could get worse before it gets better. The loonie could even hit an all-time low against the United States dollar, according to some analysts. And if that happens, there is one TSX stock I wouldn’t touch with a 50-foot pole — no matter how high the dividend gets.
Image source: Getty Images
Why the loonie matters
Before I get into the TSX stock itself, let’s go over why the loonie matters so much — especially when it comes to oil and gas companies producing out of the United States. When the Canadian dollar depreciates against the U.S. dollar, it means that it takes more Canadian dollars to purchase one U.S. dollar. For Canadian energy companies operating in the United States, a weaker Canadian dollar can increase their costs of production in several ways.
Canadian energy companies often need to import equipment, machinery, and services from the United States to support their operations. A weaker Canadian dollar makes these imports more expensive in Canadian dollar terms, increasing their production costs.
Various operating expenses, such as transportation, logistics, and maintenance costs, may increase for Canadian companies operating in the United States if they are denominated in U.S. dollars. This would also include labour costs, as a weaker Canadian dollar may increase their labour costs when converting U.S. dollar-denominated wages and salaries back into Canadian dollars. Even worse? If Canadian energy companies have debt denominated in U.S. dollars, a weaker Canadian dollar would increase the cost of servicing that debt in Canadian dollar terms.
Avoid Suncor stock
In this case, I would avoid Suncor Energy (TSX:SU) like the plague. Suncor stock is one of Canada’s largest integrated energy companies, with significant operations in the United States, particularly in the oil sands of Alberta and offshore projects in the U.S. Gulf of Mexico. While a lower loonie could mean more profit in Canada, in the U.S., it will mean more costs.
Suncor stock, like many multinational companies, is exposed to currency exchange rate fluctuations. A weaker Canadian dollar could impact Suncor’s financial performance, especially if it earns revenue in U.S. dollars but reports earnings in Canadian dollars. Fluctuations in exchange rates can affect the company’s cash flows, earnings, and ultimately its stock price.
Suncor competes with other energy companies, both domestically and internationally. If its production costs rise due to a weaker Canadian dollar, it may become less competitive compared to peers with lower production costs or operations in regions with stronger currencies.
Bottom line
It’s already been a difficult time for Suncor stock. The company cut its dividend in half in the last few years to make up for production losses. And now, a lower loonie could cause even more trouble. Sure, it has a 4.07% dividend yield. And shares are indeed up in the last year!
But those shares are starting to wobble. Should Suncor stock see a rise in costs and a lower loonie, the company could suddenly be in for a world of hurt.
