Canada’s energy market has been pumping up momentum post-pandemic as the world’s oil and gas supply chain underwent a remarkable shift. The ban on Russian oil and the Israel–Hamas war encouraged Europe to look for new suppliers of oil and natural gas. It came as an export opportunity for North American natural gas. Since then, Canadian energy stocks have been rising on export opportunities.
The economic scenario for energy stocks
The energy sector is likely to witness another big shift in 2025. This time, it could affect oil prices. U.S. President Donald Trump’s energy plan to drill more oil to make United States’ oil cheap and impose a 25% tariff on Canadian imports sent Canadian energy stocks into a correction zone in January.
According to Fitch Ratings, a 25% tariff scenario could hit the production of oil and gas. Consequently, oil producers and oil and gas pipelines could see a significant drop in revenue, ending their three-year rally. Now, you may wonder if their revenue falls, are they good stocks to buy?
Let’s go back to the year 2018 when Trump imposed tariffs on Canadian imports. Canada retaliated with tariffs, and this led to a trade war. Most energy stocks fell to their multi-year low. However, the market leaders and dividend aristocrats continued to pay dividends. And after a year, some agreements were signed and deals negotiated to give tariff exemptions to affected businesses.
Will 2025 be a repeat of 2018, or will the tariff move be nipped in the bud and negotiations achieved without imposing tariffs?
As I see, the markets have matured and are already prepared with better measures to avoid the mistakes they made in the past. The short term could be volatile for energy stocks, but the long-term growth prospects of natural gas exports remain strong.
Suncor Energy stock
The share price of Canada’s largest integrated oil producer, Suncor Energy (TSX:SU), fell 3.9% after Trump’s oath-taking ceremony. However, it continues to trade near its high of above $55. Trump wants to produce more oil in the United States and reduce oil prices worldwide. If oil prices fall, Suncor’s profit margin will fall as it would have to sell oil at a lower price.
An example of the profit margin dip was visible in Suncor’s 2023 earnings, as its profits fell 42% year-over-year because the price realized per barrel fell significantly. If we estimate that Suncor will realize 2021-level oil prices in 2025, its profits could fall another 43% to around $3.8 billion. Suncor could continue to pay dividends even when the profits fall, as it did in 2018. This is because the company operates in three segments: oil sands, exploration and production (E&P), and refining and marketing (R&M).
When oil prices rise, Suncor’s profits from oilsands and E&P rise, and when the oil price falls, the volumes from R&M drive dollar profits. The integrated functions help Suncor balance its cash flows and pay stable dividends. Except for the pandemic years (2020-2021), Suncor has been growing its dividends since 2003.
A decision to impose a tariff could significantly pull down the stock price, and a decision to not impose a tariff could increase the stock price above $55. Given this 50-50 probability, you could consider buying some Suncor stocks now and some after a decision around tariffs is finalized.
TC Pipeline stock
TC Pipeline (TSX:TRP) is an energy infrastructure stock you could consider buying for dividends. The pipeline company has successfully launched the Coastal GasLink pipeline to export natural gas to Europe. A trade war between the United States and Canada could affect American volumes and slow revenue. However, the company’s strong pipeline infrastructure could generate sufficient cash flow to pay dividends.
The company has spun off its oil pipeline business, giving it the flexibility to grow its gas pipelines faster. Hence, TC Pipeline’s dividend per share is expected to be $3.29 in 2025, and that of its spun-off oil business South Bow is expected to be $2 in 2025. Note that the annual dividend per share is determined assuming the two companies sustain their quarterly dividends of $0.8225 and $0.5, respectively, payable on January 31, 2025. TC Pipeline expects to generate 3–5% dividend growth.
