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Suncor Stock: Many Potential Growth Catalysts
Stock Analysis & Ideas

Suncor Stock: Many Potential Growth Catalysts

Suncor (SU) is a Canadian energy company with a focus on the Canadian oil sands. We are neutral on the stock.

Growth Catalysts

The most obvious growth catalyst for Suncor is the high price of oil. The higher the price, the more money it makes. Currently, the price of oil is in the high $70 range which is much above the company’s breakeven price of approximately $35 per barrel, which includes dividends. Excluding dividends, the breakeven price is closer to $30 per barrel.

This brings us to our second catalyst, which is the company’s plan to improve efficiency. Suncor has set targets to reduce the breakeven cost by approximately $4.50 per barrel by 2023 and $8 per barrel by 2025.

This would translate to breakeven costs of $27 per barrel after dividends and $22 per barrel before. Of course, Suncor would also have the option of increasing its dividend to remain at $35 per barrel, which would greatly benefit investors.

In addition, the company is deleveraging its balance sheet and aggressively buying back shares. The company plans to commit 50% of cash flow after CapEx and dividends to paying down debt, and the remaining 50% to share repurchases.

Although debt is not a concern for Suncor, debt repayment further reduces its risk profile. This could potentially lead to a multiple expansion because investors would feel more comfortable with a reduced debt load. In addition, the lower interest payments would also add to the bottom line.

Less debt combined with a lower breakeven cost will allow Suncor to become more resilient to price shocks during economic slowdowns. Furthermore, the stock buybacks will push up the earnings per share numbers to help boost the per-share price of the stock.

Risks

Just like the price of oil is currently a bullish catalyst for Suncor, it could quickly become its biggest risk factor. It currently seems that the price of oil is somewhat stable in the $70 range, but anything can happen to push the price lower.

Like any commodity, supply and demand are the key drivers. On the supply side, OPEC+ could easily decide to boost production to a point where it may put downward pressure on the price. On the demand side, slower than expected growth or continued COVID-19 related lockdowns will have a similar effect.

In addition, a big driver of inflation has been energy prices. It may be possible that the Federal Reserve might raise interest rates high enough to indirectly impact the demand for oil by creating an economic slowdown.

Wall Street’s Take

Turning to Wall Street, Suncor has a Strong Buy consensus rating, based on 12 Buys and two Holds assigned in the past three months. The average Suncor price target of $33.65 implies 19.3% upside potential.

Final Thoughts

We remain neutral on Suncor because we personally don’t like investing in commodity-based companies. That said, the company is taking the right steps to improve the efficiency of its operations by aiming to significantly lower its breakeven cost. In addition, the deleveraging of its balance sheet should give investors more peace of mind for rainy days.

For investors who are optimistic about the price of oil and want exposure to energy, Suncor is definitely one of the top oil stocks.

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Disclosure: At the time of publication, StockBros Research did not have a position in any of the securities mentioned in this article.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates  Read full disclaimer >

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