It’s hard to put together a bullish case for Canada’s top oil stocks these days.
After a stunning rally this year, oil is in the bear territory. Futures in New York were trading more than 20% down from a four-year high reached in early October.
In London, Brent sank to a seven-month low below $70 a barrel. For Canadian producers, the situation is worse, as they struggle to move their supplies due to acute pipeline shortages in the country.
Does this dismal situation provide a good reason to exit Canada’s top oil stocks? In my view, it wouldn’t be a good idea. Here is why.
Energy companies belong to an important segment of the Canadian economy, making up about one-third of the total market capitalization of the S&P/TSX Composite Index.
Integrated energy companies with strong balance sheets and solid assets generally perform better in market downturns. Such companies can also provide decent long-term returns to investors whose objective is to hold on to their investments and ride through the market volatility.
Two top stocks to buy
Let’s consider Canada’s two top oil stocks: Suncor Energy (TSX:SU)(NYSE:SU) and Canadian Natural Resources (TSX:CNQ)(NYSE:CNQ), which I like for long-term investments.
Calgary-based Suncor is an integrated energy company with a portfolio of high-quality assets, including oil sands extraction, refining, and marketing the energy products to industrial, commercial, and retail customers.
Suncor operates one of the lowest-declining and most-enduring upstream asset bases globally. That makes it possible for the company to produce steady and stable recurring cash flow, even under modest commodity price assumptions.
During the past five years, Suncor’s cost to dig a barrel of crude oil has fallen to $23.80 in 2017 from $37 in 2013, representing the lowest level achieved in more than a decade.
Suncor’s downstream operations, which include more than 1,700 Petro-Canada stations and oil refineries, provide a solid hedge to widening heavy oil differentials.
Canadian Natural Resources pursued a smart acquisition strategy during the last oil downturn. By taking advantage of lower oil prices and its strong balance sheet, CNQ acquired oil sands assets last year from Royal Dutch Shell (LON:RDSa). That deal gave CNQ increased scale and sustainability from long-life assets.
While some producers withheld their expansion plans amid Canada’s pipeline shortages, CNQ is going full steam ahead with its expansion. In August, the company said it was increasing its capital spending plans for the remainder of 2018 by $170 million, bringing its total for the year to $4.6 billion.
The additional money will be spent to expand the company’s Horizon oil sands mine by up to 95,000 barrels of oil per day, potentially a 40% capacity jump.
Bottom line
Suncor and CNQ are two good stocks to buy in any market downturn. They are solid income stocks that long-term investors can buy during the market slump and lock in their higher dividend yields. If this oil downturn extends, it will provide oil bulls another opportunity to buy these top oil stocks at attractive prices.
Fool contributor Haris Anwar has no position in any stocks mentioned.