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Suncor: Righting the Ship amid Higher Oil Prices
Stock Analysis & Ideas

Suncor: Righting the Ship amid Higher Oil Prices

After lagging the performance of its oil patch peers over the course of 2021, Canadian oil giant Suncor Energy (SU) seems to be righting the ship.

Suncor announced that it is doubling its dividend, and increasing its buyback program.

I am bullish on shares of Suncor as the company turns things around, and renews its commitment to increasing returns to shareholders. (See Analysts’ Top Stocks on TipRanks)

Underperformance YTD  

The gains over the past several weeks have narrowed the gap somewhat, but shares of Suncor have still lagged the performance of peers such as Cenovus (CVE) and Imperial Oil (IMO) year-to-date.

Suncor is now up 55.7% year-to-date, and Cenovus and Imperial are both up over 80%. While not a perfect comparable as it is a much smaller company, Baytex Energy (BTEGF), another Canadian producer, is up over 470% year-to-date.

While this underperformance during a great time for energy equities has been unfortunate for Suncor shareholders, it also means the possibility for an opportunity with regression to the mean. 

Returns to Shareholders 

While Suncor and most of its peers suffered when oil prices plummeted well below their breakeven cost of production in 2020 for a prolonged period of time, now that oil prices have been increasing at a steady cadence, Suncor is using this turnaround to make some accretive capital allocation decisions.

With a reported all-in breakeven price of $35 a barrel, which covers operational costs, sustaining capital and the dividend, oil prices in the $80 range are a boon for Suncor. 

On its quarterly earnings call, Suncor made the welcome announcement that it is doubling its dividend payout. The NYSE-listed shares in the U.S. now pay out $1.36 per year, which equates to a yield of 3.7% at current prices. Suncor had previously cut its dividend in 2019 amidst struggles with low oil prices and other challenges, so this hike takes Suncor’s payout back to where it was in 2019. 

The company also announced plans to increase its current share buyback program, which will see it retire an additional 2% of shares outstanding by February 2022. This means that shares outstanding will have decreased by 7% during this current buyback program.

This will also return capital to shareholders as it will reduce the number of shares on the market and increase earnings per share. Share buybacks are also a sign that management believes the company is undervalued, and can help to support the stock price. 

In addition to buying back shares and paying out more to shareholders, Suncor will also be taking advantage of higher oil prices to pay down debt, with a targeted net debt of $15 billion by the end of 2021. 

On the conference call, CEO Mark Little highlighted the company’s capital allocation, stating, “Even with a significant increase to the dividends and continuation of the buyback program, we’re planning to accelerate the pace of achieving the net debt targets.”

“This reflects our confidence in the performance of our asset base and the strong free funds flow generation across our integrated model, taking advantage of strong commodity prices. To put this into perspective, Suncor today, is on track to deliver similar debt levels and a lower number of outstanding shares than it had in 2015. However, with 35% higher production, a resilient downstream, and a lower break even.”

Wall Street’s Take

The analyst community views Suncor as a Strong Buy; 11 analysts rate Suncor as a Buy, three rate it a Hold, and no analysts consider Suncor to be a Sell. The average Suncor price target of $31.34 implies 20.4% upside potential to current share prices. 

Takeaway 

Oil prices have stayed well above Suncor’s breakeven for quite some time, with no signs of a reversal on the horizon as much of the world is in an energy crunch. These higher prices have allowed Suncor to reduce debt and increase its returns to shareholders.

Based on these moves by management, the dividend yield, and the fact that the shares have still underperformed those of its peers (meaning that there is more room to run), Suncor stock looks promising over the long term.

Disclosure: At the time of publication, Michael Byrne owned shares of Baytex Energy.

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