Canadian energy stocks experienced setbacks after Donald Trump announced a 10 per cent tariff on Canadian energy exports to the United States and a 25 per cent tariff on other goods. Trump’s intention was to drill enough oil from U.S. for export to reduce the trade deficit with other countries, but the result may not be as expected.
First and foremost, the US cannot use domestically produced light oil for consumption at this stage because 20-25% of US refineries are equipped to refine Canadian heavy oil. New equipment to refine light oil would require significant capital expenditure. Therefore, a quick and effective solution would be to export light crude and continue to use Canadian heavy crude for domestic demand.
A one-month delay in the imposition of tariffs gives importers time to stockpile oil before the tariffs are imposed. However, demand is likely to slow in the coming months, potentially lowering oil inventories.
For Canada’s largest oil producers, Canadian Natural Resources (TSX:CNQ) and Suncor Energy (TSX:SU), their profits are directly tied to the price of oil. An oil price of $70 a barrel keeps cash flow and profits healthy for both companies. But tariffs could raise the price of oil, incurring costs that would be borne by exporters, consumers, or both.
As a result, we’ve seen Suncor shares fall 15% between February 11 and March 5, before recovering 11.3% in March. Canadian Natural Resources fell 17.5% between January 20 and March 3 and recovered 14.8% thereafter. Meanwhile, oil and gas pipeline stocks Enbridge (TSX:ENB) and TC Pipeline shares rose 5.75% and 7.24%, respectively, after the tariffs were implemented on 4 March.
That said, once the tariffs were actually implemented, these affected companies were clear on where they stood, which helped management take the necessary steps to deal with the tariff situation, including allocating funds, negotiating prices with customers, and planning operations accordingly. It’s no surprise, then, that energy stocks have risen since the tariffs were implemented.
And this hasn’t been the first time Canada has faced tariffs. Most industry experts suggest that the tariffs are unlikely to be sustainable in the long term, given their impact on trade, and that Canada and the U.S. will continue to negotiate and work to improve their own economies.
Its is expected that oil producers, particularly Suncor, are likely to hit most by the tariffs. If the price of oil falls below a certain threshold that makes production unprofitable, oil producers may cut back on production. It would then be a prudent move for investors to stay away from Suncor stock for the time being.
Meanwhile, it seems safer to buy and hold Enbridge. Management says the tariffs are unlikely to have a material impact on its cash flow, and Enbridge’s pipeline infrastructure delivers 40 per cent of Canada’s oil exports to the U.S., making oil delivery cost-effective.
The company plans to increase its dividend by 3 per cent by 2026. If the tariff issue is properly resolved by then, Enbridge will continue to meet its target of a 5 per cent dividend increase from 2027.
