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Dividends in Canadian energy

Opportunities, risks and top picks that aren't only Enbridge

Ruth Saldanha 23 January, 2020 | 1:51AM
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Ruth Saldanha: Canadian energy is one of our best ideas for 2020. What are some of the reasons for this and where should you invest in energy for the long term? With me to discuss this is Morningstar analyst Joe Gemino.

Joe, thank you so much for being with us today.

Joe Gemino: Thank you for having me, Ruth.

Saldanha: To begin with, why do you like Canadian energy for 2020?

Gemino: Well, Ruth, we see 2020 as a transitional year for Canadian energy. We think this year will kind of await the fate of the pipeline expansion projects and see what happens with the heavy oil discount and what impact production curtailments, rail shipments and system optimizations will have on the heavy oil discount. And we think a few of these things need to play out before we start to see some of the benefits and upside to some of the Canadian energy names.

Saldanha: 2019 saw the sector be quite beaten down. Do you think there are any more risks that we should keep an eye out for this year?

Gemino: Yeah, we do think there are a few risks. I think the first risk would be centred around any cancellations of the major pipeline expansion projects, along with the potential for the election of a democratic president in the United States, and any further widening of the heavy oil discount, I think would be another risk as well.

Saldanha: On the other hand, what do you see as being some of the opportunities for this year?

Gemino: Well, really the major opportunities center around the opposite. If there's any positive news on the pipeline expansion projects, if President Trump is reelected in the U.S. and the system optimizations that could increase capacity and the current infrastructure could also help to narrow the heavy oil discount.

Saldanha: So, what's your top Canadian energy pick for this year?

Gemino: Well, really Ruth, there are two names that we like, and they're both our best ideas. The first is Enbridge (ENB). We see about 20% upside in the stock to go along with its 6.2% yield. And really, we think the market is underappreciating cash flows from the Line 3 replacement project, along with the future cash flows associated with the rest of the mainline pipeline. The other idea that we like is Cenovus Energy (CVE). We see it trading at a 30% discount to our fair value estimate. And really, here we see the market underappreciating the best-in-class oil sands assets and the low-cost structure associated with them to go along with the further potential for the company's solvent-aided process to lower extraction costs even further. But we do want to caution investors with Cenovus Energy that it's more of a long-term story and it may be a while before the markets' concerns are addressed.

Saldanha: Earlier this year, you told us why you like Enbridge from a dividend standpoint. Are there any other energy names that you like for dividends?

Gemino: Yeah, there really are. In the midstream Canadian energy sector, it's really ripe with dividend opportunities. You have Inter Pipeline (IPL), which is yielding almost 8%, but the company doesn't have much dividend growth potential. On the other hand, you have TC Energy (TRP), which is yielding about 4.5% and does have a lot of dividend growth potential. We think the company can increase its dividend by 8% to 10% annually if the Keystone XL is built for the next five years.

Saldanha: Thank you so much for joining us with these ideas, Joe.

Gemino: Thank you for having me, Ruth.

Saldanha: For Morningstar, I'm Ruth Saldanha.

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About Author

Ruth Saldanha

Ruth Saldanha  is Senior Editor at Morningstar.ca. Follow her on Twitter @KarishmaRuth.

 
 
 

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