Energy stocks took center stage in the United States-Canada tariff war. Energy is the single biggest commodity that Canada exports to the United States. The United States’ dependence on Canadian oil and gas is evident in the tariffs. On March 4, U.S. president Donald Trump imposed a slightly lower tariff of 10% on “energy or energy resources” against 25% on other goods. Is now a good to buy Canadian energy stocks?
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Canadian energy stocks and tariffs
The Canadian energy sector has two major oil producers, Canadian Natural Resources (TSX:CNQ) and Suncor Energy (TSX:SU). Their profits depend on the oil price at which they sell their output. A US$70/barrel price keeps the cash flows and profits healthy for the two. The tariffs could increase the oil price, and costs would be borne either by the exporter, the consumer, or both. The United States wants to drill sufficient oil for export so that it can reduce its trade deficit with other countries.
However, it cannot use domestically produced light oil for its consumption, as 20-25% of its refineries are equipped to refine Canada’s heavy oil. Equipping U.S. refineries for light oil would require significant capital spending. A quick solution could be exporting light crude oil and continuing to meet domestic requirements with Canada’s heavy crude oil.
Canadian oil stocks saw an increased demand for their oil ahead of the tariffs. The one-month delay in tariff imposition gave importers time to stock up. However, demand could slow in the coming months, which could pull down oil stocks.
Suncor stock fell 15% between February 11 and March 5 and recovered 11.3% in March. Canadian Natural Resources stock fell 17.5% between January 20 and March 3 and recovered 14.8% in March. Not just oil producers but oil and gas pipeline stocks Enbridge (TSX:ENB) and TC Pipeline also surged 5.75% and 7.24%, respectively, after the tariffs were implemented on March 4.
Why did energy stocks rally after tariff implementation?
The above energy stocks have been falling in January and February amidst tariff uncertainty. Once the tariffs were in place, the companies got clarity on what they were dealing with. This will help the management take the necessary steps to tackle the tariff situation. They could make provisions, negotiate prices with clients, and accordingly plan operations.
Hence, energy stocks surged after the tariffs were implemented.
This is not the first time Canada has faced tariffs. Most industry experts suggest that tariffs are unlikely to last for a prolonged period, given their impact on trade. Talks between the two parties might heat up but will eventually cool as they reach a negotiation for the betterment of their economies.
Stocks to avoid
Oil producers, especially Suncor, could be hit the most by the tariffs. They might reduce production if the oil price falls below a certain threshold, which makes production unprofitable. It would be better to avoid buying Suncor stock, as most of its output is exported to the United States.
Suncor’s stock price is sensitive to oil prices. Its integrated upstream and downstream operations make it a beneficiary in a normal situation. When oil price rises, its upstream operations benefit, and when prices fall downstream operations benefit due to higher volume. However, this time, Suncor could see a dip in both oil price and demand.
Stocks to buy
In the meantime, Enbridge is a stock you could continue to accumulate. The company’s management stated that tariffs are unlikely to have a material impact on its cash flows. Enbridge’s pipeline infrastructure transmits 40% of Canada’s oil exports to the United States, making oil transmission cost-efficient. Unless tariffs are very high and prolonged, there is no reason to worry about Enbridge.
The company will continue to give dividends and increase them by 3% till 2026. If the tariff issue is resolved by then, Enbridge could continue with its aim to grow dividends by 5% from 2027 onwards. The management is closely following the tariff situation and will keep investors updated on its earnings.
