If we gauge the performance of the Canadian energy sector from the energy composite index, the 2024 performance can be divided into two segments. The performance was quite decent in the first quarter, but since hitting the peak in April, the index has mostly hovered around a mean value, and the overall trend has been downward. The index has slumped over 11% since the peak in April.
Unfortunately, things don’t look that great for 2025 as well. The chances of oil prices going down further are high, which may lead to a correction in the sector.
An upstream energy company
Canadian Natural Resources (TSX:CNQ) is one of the largest energy companies in Canada by several metrics. It’s one of the few large-cap stocks close to or beyond the $100 billion mark (with its current market cap of around $97 billion). It also boasts the largest crude oil and natural gas reserves in the country, the largest crude oil producer, and the second biggest natural gas producer.
As an upstream company, Canadian Natural Resources is quite vulnerable to oil price dips, but historically, the company has survived such slumps quite well. One reason behind this is the company’s low-cost production, which gives it more leeway.
But the market dynamics are still taking their toll on the stock. It has fallen 18% from the yearly peak. If a correction happens, the stock may fall even harder. One benefit would be its yield rising to mouthwatering levels. It’s already at 4.8%.
An integrated energy company
Integrated energy companies like Suncor (TSX:SU) may react differently to the same kind of headwinds. First, they have more room to absorb the negative impact of low oil prices. They can manage the profit margin and expenses by making adjustments to their midstream and, most importantly, downstream businesses.
This may be why Suncor stock is handling the current index slump quite well. It’s plateauing but not falling yet. But that doesn’t mean it would be able to sustain low oil prices and demand in the long term. The company has already slashed its dividends once during the pandemic.
It may do so again if the market is weak enough. Also, as an integrated company, Suncor is also vulnerable to downstream-impacting factors like electric vehicles gaining more traction.
A midstream energy company
Midstream companies, especially giants like Enbridge (TSX:ENB), might fare well even if the energy sector enters a correction phase. The company already has a history of contrarian performance. It slumped when the rest of the energy sector was bullish, and now, when the sector/index is relatively weak, the stock is going up at a decent pace.
Part of the reason behind this midstream “safety” is that as a pipeline company, its revenue is tied to the contracts upstream companies make with it. These contracts are relatively long-term and don’t change much, regardless of the oil prices.
A significant slump in oil demand and smaller quantities transporting via Enbridge’s pipelines may impact its top line, but otherwise, the company is safe. It has an additional cushion in the form of a gas utility business.
Foolish takeaway
The three energy stocks may behave differently in the correction mode. They will also behave quite differently in a bullish market, but the chances of such a market manifesting are low compared to a correction (that seems more likely).
However, a correction may not be a bad thing, especially if you are eyeing some of these energy stocks for their dividends, as it may allow you to lock in a high yield.
