Oil prices have plunged, of course. We expect prices to remain lower for an extended period of time. That’s partly because ‘fracking’ shale oil can be turned on and off fairly quickly. As a result, as prices recover, we would expect shale oil production to rise. This would hold down the price of oil.
A second factor is that we don’t see OPEC (the Organization of the Petroleum Exporting Countries) cutting production. That’s because if they did, non-OPEC producers would likely fill the gap. OPEC wants to maintain its market share.
We expect lower oil prices to last a while
A third factor is that some producers are desperate for cash. Countries that come to mind include Russia and Venezuela. Russia, for instance, is heading into a recession. It may try to at least partly offset lower prices with higher production. To the extent that cash-strapped countries can raise their production, it will keep a lid on the price of oil.
Given our assessment, we’ve temporarily put a hold on many energy-related stocks. This includes our Key stocks Cenovus Energy (TSX—CVE; NYSE—CVE), EnCana Corp. (TSX—ECA; NYSE—ECA) and Ensign Energy Services (TSX—ESI). We would also hold other oil and gas producers or oil-services stocks until the effects of lower energy prices become clearer.
These Key stocks remain buys
Two exceptions that remain buys are integrated oil producers Imperial Oil (TSX—IMO; (NYSEMKT—IMO) and Suncor Energy (TSX—SU; NYSE—SU). They’re more diversified than companies that only explore for and produce oil. After all, both also refine oil into products such as gasoline. They sell products through their chains of gas stations. We notice that one of Imperial Oil’s ESSO stations near the office is always busy. To the extent that cheaper gas leads more people to drive, Imperial Oil and Suncor Energy’s retail businesses stand to profit. Also, both have solid balance sheets.
We also continue to keep a buy rating on Key stocks Enbridge Inc. (TSX—ENB; NYSE—ENB) and TransCanada Corp. (TSX—TRP; NYSE—TRP). The fact is producers need to ship much of their production. The cheapest way is through pipelines. Both companies remain buys for long-term share price gains as well as attractive and rising dividends.
We also maintain buy ratings on Key stock railroads Canadian National Railway (TSX—CNR; NYSE—CNI) and Canadian Pacific Railway (TSX—CP; NYSE—CP). With a dearth of new pipeline capacity, at least some oil-by-rail will continue. Besides, the railroads carry many other products. Both remain buys for long-term share price gains and small, but rising, dividends.
The Investment Reporter, MPL Communications Inc.
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