The uncertainty has ended. Canadian energy exports to the United States face a 10% tariff effective March 4. Stock prices of Canadian oil producers such as Canadian Natural Resources (TSX:CNQ) to Suncor Energy (TSX:SU) moved more than 10% on tariff updates, highlighting their vulnerability to tariffs. The companies did state that tariffs pose a risk as they export a certain portion of their output to the United States, but could not quantify their impact.
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Canadian oil stocks
This brings us to the dilemma of whether energy stocks are a good buy or the oil and natural gas uptrend is over. Canadian energy stocks are trading near their highs despite the tariff correction. They have been one of the key beneficiaries of rising oil and natural gas prices because of wars in other major oil-producing nations.
Canadian Natural Resources, Suncor, and even smaller oil companies are operating at 100% capacity and record production. In commodities, record production brings economies of scale and reduces costs. However, if the oil price falls, the windfall gains from selling the output at higher prices begin to shrink.
Suncor estimated that every US$/barrel reduction in WTI crude price could reduce its adjusted funds from operations by $200 million. It has given its 2025 guidance considering a $75/barrel price. Canadian Natural Resources has given its 2025 guidance considering a $70/barrel price. And WTI is currently at US$69.16/barrel.
Both stocks are trading near their cyclical peaks, with Canadian Natural Resources near its all-time high. Price-to-earnings (PE) valuations may not work for these stocks, as their earnings could fall drastically once the upcycle ends.
Canadian energy stock to avoid
Now may not be a good time to buy oil-producing stocks. If you bought CNQ and Suncor stocks near the pandemic dip, now is a good time to sell these stocks and book profits of 220% and 160%, respectively. This is because a tariff from its biggest client could put downward pressure on its share price.
It would be wrong to say that the world has changed for oil producers because tariffs are temporary and oil will still be exported. However, the economics will change for oil producers. Their earnings/barrel might fall after incorporating the tariff. Until they find the new normalized earnings, their stock prices could face downward pressure.
If you already own these stocks, consider selling them and using the capital gains to buy them at the dip.
Canadian energy stock to buy
At times of uncertainty, you could consider buying energy infrastructure stocks like Enbridge (TSX:ENB). Enbridge’s earnings are not directly impacted by oil prices. And as we said before, tariffs are not a ban on oil trade. Trade will still happen, but volumes might fluctuate.
Moreover, Enbridge has purchased three gas utilities in the United States. Their earnings may not be affected by tariffs. Even if Enbridge’s stock price falls, it can rebound to $60 once oil volumes pick up. Enbridge’s management has clarified that 10% tariffs may not bring a material change in its earnings. For Enbridge to be affected, tariffs have to be high and prolonged, and that is unlikely, as it could significantly hurt the economic growth of Canada and the United States.
