2 Reasons to Avoid Suncor Energy Inc., and 1 Stock to Buy Instead

Suncor Energy Inc. (TSX:SU)(NYSE:SU) is very popular among professional investors, but Canadian Natural Resources Ltd. (TSX:CNQ)(NYSE:CNQ) is one of the better options.

| More on:
The Motley Fool

When looking at professionally managed Canadian equity funds, Suncor Energy Inc. (TSX: SU)(NYSE: SU) is often one of the largest holdings. This should not be surprising: Suncor is Canada’s largest energy company, and also the fifth-largest publicly traded company in the country. Even Warren Buffett holds shares.

But there are reasons to avoid adding Suncor to your portfolio, and two of them are shown below. Then we take a look at a stock you should consider instead.

1. Poor economics

Energy is a very capital-intensive sector to be in, and this leads to challenges. In plain English, energy companies must constantly spend money just to maintain current levels of production. Companies that have the best assets, and the best economics, thus have a big advantage.

And Suncor does not appear to be one of those companies. This came to light very recently, when partner Total pulled the plug on its $11 billion Joslyn oil sands project, in which Suncor owns a 36.75% interest. The two companies, however, are still developing the $13.5 billion Fort Hills project. And there’s some bad news: Fort Hills has marginal economics as well, with a cost of $75,000 per flowing barrel, one of the highest in the industry.

It should be telling that Suncor is going ahead with this kind of project; evidently, it doesn’t have better uses for its money, and that should be very concerning for long-term shareholders.

2. Too spread out

We all know that investors should seek out diversification. And with Suncor, you can get diversification with just one holding. The company has operations in Alberta, Eastern Canada, the United States, Europe, and even in Tripoli. In addition, Suncor has a big refining and marketing business, best known for the Petro Canada gas stations. So what’s not to like?

Well, you usually don’t want to see one company involved in so many business lines. It often means it lacks focus and just wants to be as big as possible. Students of history may remember the 1990s, when Suncor sold its gas station business to focus on producing energy. Then, in 2009 it reversed course with the $17 billion acquisition of Petro Canada.

Such actions are by no means awful, but it’s usually better to find companies that do just one thing, and do that thing very well.

1 stock to buy instead: Canadian Natural Resources Ltd.

Canadian Natural Resources Ltd. (TSX: CNQ)(NYSE: CNQ) is Canada’s second-largest energy company, with a market capitalization of nearly $50 billion. It also has some big advantages over Suncor.

First of all, its projects typically have better economics, especially when compared to Fort Hills. For example, its latest Horizon project expansion costs less than $20,000 per flowing barrel.

Secondly, it is more focused than Suncor — while there are some international operations at CNRL, they are very minor. And there is no gas station business.

Finally, CNRL has shown to be very good at what it does, which is deploying capital and controlling costs. Investors have been richly rewarded thus far, with a 17% annual return over the past 15 years. Meanwhile, Suncor shareholders have earned 13%. So when choosing between the two companies, the choice should be clear.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair has no position in any stocks mentioned.

More on Investing

Happy family father of mother and child daughter launch a kite on nature at sunset
Investing

3 Soaring Stocks to Hold for the Next 20 Years

These three stocks are good bets for the long haul, given their healthy long-term growth prospects.

Read more »

grow dividends
Tech Stocks

Celestica Stock Is up 44% Since Earnings: What Investors Need to Know

Celestica continues to benefit from strong demand and production efficiencies, yet the stock remains undervalued.

Read more »

A plant grows from coins.
Investing

2 Dividend Stocks Paying 5% or More That Could Beat the Market in 2024 and Beyond 

Here are two top dividend stocks long-term investors may certainly want to consider for their yields and growth profiles right…

Read more »

edit Balloon shaped as a heart
Dividend Stocks

Love Value Stocks? 2 That Are Screaming Buys in May 2024

Patience can pay off by investing in these two value stocks with nice dividends and the potential to turn around.

Read more »

healthcare pharma
Tech Stocks

What’s Going on With WELL Health Stock?

WELL stock (TSX:WELL) made strong moves once again, with record earnings and even higher guidance for 2024.

Read more »

Senior Couple Walking With Pet Bulldog In Countryside
Dividend Stocks

2 Everlasting Canadian Stocks for Your RRSP

The Canadian National Railway (TSX:CNR) stock is worth owning for the long haul.

Read more »

money cash dividends
Stocks for Beginners

Is TD Stock the Best Dividend Stock for You?

Shares of TD stock (TSX:TD) plunged on the news of a money laundering probe. But could this mean it's a…

Read more »

exchange traded funds
Investing

New to Investing? Get Started With This Easy, Hands-Off Method

Vanguard S&P 500 Index ETF (CAD-hedged) (TSX:VSP) is a glorious first investment candidate for beginner investors.

Read more »