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The Zacks Analyst Blog Highlights: Enbridge, TransCanada, Suncor, Imperial and Cenovus

The Zacks Analyst Blog Highlights: Enbridge, TransCanada, Suncor, Imperial and Cenovus

For Immediate Release

Chicago, IL –December 17, 2018 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: Enbridge Inc. ENB, TransCanada Corp. TRP, Suncor Energy Inc. SU, Imperial Oil Ltd. IMO and Cenovus Energy Inc. CVE.

Here are highlights from Friday’s Analyst Blog:

Take On These Canadian Energy Stocks for Long-Term Gains

The three-year oil industry downturn since mid-2014 along with U.S. shale revolution has hit the Canadian energy sector hard. Canada is still reeling under pipeline capacity shortage, which has taken a toll on the nation’s top oil stocks.

Oil Production Cuts Provide Some Sigh of Relief

Precisely, pipeline construction in Canada has failed to keep pace with rising domestic oil, forcing producers to sell their products at a discounted rate. Moreover, environmental protests are on the rise, further derailing construction. 

Owing to the supply glut and pipeline pinch, the Western Canadian Select (WCS) has been witnessing big discounts against the U.S. benchmark West Texas Intermediate (WTI), which led the Alberta government to issue a mandate on Dec 2, 2018 to remove 325,000 barrels of oil production per day from the market beginning in 2019. The government’s intervention has in turn led to a dramatic improvement in western Canadian oil prices.

Notably, the spread between the WCS and the WTI has fallen steeply from more than $50 a barrel in October to nearly $25 on Dec 3, post the announcement of Rachel Notley’s decision of reducing heavy crude production by 8.7%. The differentials have been tightening since then to as little as around $10 a barrel recently. While it’s too early to say whether these narrowing differentials between WTI and WCS are short-lived or are here to stay, it has certainly provided a ray of hope. 

Additional Pipeline, Rail & Refinery Capacity Bodes Well 

While Canada is currently facing pipeline crunch with no short-term solutions in sight, the problems are bound to get resolved as the country can’t possibly overlook the energy sector’s importance to overall national economy.

Notably, crude-by-rail shipments, which recorded a high of 270,000 barrels per day in September 2018, are reportedly expected to increase to more than 700,000 by next year. Market access for Canada’s crude is also expected to improve over the coming years with Enbridge Inc.’s Line 3 replacement project, which is likely to become functional in late 2019. While the Trans Mountain pipeline’s expansion and TransCanada Corp.’s Keystone XL Pipeline are presently in limbo after being temporarily suspended by court decisions, both are expected to come online by the start of the next decade.

Rachel Notley has been looking for solutions to solve the ongoing energy crisis in the country. In this context, she has recently announced her intention of building a new refinery in Alberta, which is expected to do wonders for the local economy and producers operating in the region in the long term. Notably, the North West Sturgeon Refinery (with estimated capacity of 80,000 barrels per day) near Edmonton is scheduled to commence commercial operations next year, which will provide enough respite to the producers.

While there is much ambiguity relating to the Canadian oil industry as of now, the tide may turn for the country in the long term. With new pipelines along with additional rail and refinery capacity coming into effect in the years to come, and the government’s efforts to curb production amid the supply glut, long-term prospects of the country’s energy sector are not expected to be dim, if not too bright. 

Consider Holding on to These Value Picks

Below we have highlighted three Canadian energy stocks, namely Suncor Energy Inc., Imperial Oil Ltd. and Cenovus Energy Inc., each carrying a Value Score of B and Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

Considering the current state of the Canadian energy sector and the share price of these companies, hovering close to their 52-week lows, investors might be tempted to sell off their positions in the stocks. However, when considered on a long-term investment horizon, it would make sense to hold on to these value stocks that have huge upside potential. With the pipeline situation expected to ease in the coming years along with the government’s efforts to boost the Canadian oil prices, it should not come as a surprise if these stocks rebound sharply in the coming years from their current levels. Let us delve deeper into each of the above-mentioned stocks to analyze their future prospects.

Suncor:The Canadian integrated energy giant, with a market capitalization of more than $50 billion, has a long-term EPS growth rate of 8.83%. Its diversified business model, focused on upstream oil sands operation, offshore oil and gas production, midstream as well as refining/marketing, provides Suncor the required cushion amid the volatile commodity price scenario. While the company’s shares are trading close to its 52-week low, investors are still advised to hold the stock owing to its promising prospects. 

Investors should note that the company has managed to hike its dividend for 16 consecutive years, with a dividend growth rate of around 20%. Being confident of its strong cash-flow generating ability, Suncor also authorized an expansion of its stock buyback program in the last reported quarter, from C$2.15 billion to C$3 billion. The company’s modest leverage ratio of less than 23% provides it with financial flexibility to tap on growth opportunities. Further, ramp-up activities in Suncor's major growth projects, namely Fort Hills and Hebron, along with remarkable product marketing under the Petro-Canada brand are expected to boost the company's future earnings and cash flow.

Imperial Oil: With a market capitalization of more than $21 billion, Imperial Oil’s integrated business model provides it with a high level of stability, thereby reducing the risk profile of the company. While its share price is just a tad higher than its 52-week low, it will be a prudent move to still retain the stock to your portfolio for obtaining long-term gains. Notably, the EPS growth rate of the company for the next three-five years is expected at 24.05%. 

The strong upstream, downstream and chemical business of the company, along with its commitment to return value to its shareholders bode well. The low leverage of around 18% enables Imperial Oil to tap into strategic growth opportunities. Further, as a show of confidence in its cash-generating ability, the company is dedicated to dividend hikes and share buyback programs. Alongside second-quarter results, Imperial Oil announced the renewal of its share repurchase program to buy 40 million shares till June 2019.Ramp-up activities in its important upstream projects like Kearl and Cold Lake, along with impressive refining business and marketing under the Esso and Mobil brands raise optimism.

Cenovus: With a market capitalization of around $10 billion, shares of Cenovus are presently trading more than 30% off its 52-week high. However, long-term prospects of the company are encouraging enough to still hold the stock to your portfolio. Cenovus is less exposed to volatility in energy business, given strong exposure in both upstream and downstream operations. 

Strong upstream portfolio, including Foster Creek Christina Lake oil sands project, Narrows Lake and Telephone Lake, along with impressive refining business on the back of possession of stakes in Borger and Wood River refineries bode well for the company’s growth prospects. Despite the pipeline pinch that is choking the Canadian energy sector currently, Cenovus appears to be on the mend, with the company hinting on a dividend hike in 2019. Notably, in a bid to improve its sales price, the company has also entered into three-year deals with Canada’s railroads to ship nearly 100,000 barrels of crude per day from northern Alberta to refineries along the U.S. Gulf Coast. Notably, the long-term EPS growth rate of the company is expected at around 6%.

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.


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Cenovus Energy Inc (CVE) : Free Stock Analysis Report
 
Suncor Energy Inc. (SU) : Free Stock Analysis Report
 
Imperial Oil Limited (IMO) : Free Stock Analysis Report
 
TransCanada Corporation (TRP) : Free Stock Analysis Report
 
Enbridge Inc (ENB) : Free Stock Analysis Report
 
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