3 Reasons to Hold Suncor Energy Inc.

Here’s why Suncor Energy Inc. (TSX:SU)(NYSE:SU) should be on your radar right now.

| More on:
The Motley Fool

Energy investors continue to watch in horror as the rout in the oil patch decimates the valuations of many of the sector’s former stars.

When the dust finally settles some names will disappear and others will simply emerge bigger and stronger than they were before the crisis hit.

Suncor Energy Inc. (TSX:SU)(NYSE:SU) will be one of the winners. The stock is holding up much better than most of its peers and conservative investors with a bullish view on the energy space should consider the company as one of their first picks when evaluating new positions in the patch.

Here’s why:

Integrated business model

Suncor is Canada’s largest integrated energy company, and its diversification, along the hydrocarbon value chain from production to retail, gives investors revenue stability during rocky commodity markets.

On the production or “upstream” side of the business, Suncor is primarily an oil sands producer. In fact, 6.9 of the company’s 7.7 billion barrels of reserves and 18.8 of the total 23.2 billion barrels of contingent resources are located in its oil sands properties.

That’s a lot of oil and it is all located in one spot, which means Suncor doesn’t have to deploy billions of dollars buying land and drilling for new reserves. All the capital outlays can go towards making the production process as efficient as possible.

As an example, Suncor reduced its Q1 year-over-year operating costs per barrel by 20% to just $28.40.

Suncor also operates four refineries with a combined capacity of 460,000 barrels per day. These facilities take the feedstock crude oil and turn it into end products such as diesel fuel, lubricating oil, gasoline, and asphalt. Low input costs can boost margins in the refining division when crack spreads widen, and this helps offset weakness in the upstream operations.

The company’s retail division includes more than 1,500 Petro-Canada service stations. Low gasoline prices tend to encourage drivers to take more trips and buy bigger cars. This all translates into more revenue for Suncor.

Strong balance sheet

Energy companies with high debt levels are getting killed right now because they aren’t generating enough cash flow to cover all their obligations. Suncor doesn’t have that problem.

The company finished Q1 with nearly $5 billion in cash and cash equivalents and just $13 billion in long-term debt, which is small for a company that has a market capitalization of $50 billion.

This puts Suncor in a very enviable position because it has the capability to ride out a prolonged slump in the market and has the firepower to gobble up prized assets as they come on the market at fire-sale prices.

Dividend growth and share buybacks

Suncor has a strong history of rewarding shareholders with increased dividends and an aggressive share-repurchase program. The distribution currently yields 3% and is one of the safest payouts in the sector.

Should you buy Suncor?

Some analysts say the stock is too expensive and that investors can get more bang for their buck by buying names that have been hit harder by the slump. That might be true, but there is also a lot more risk that comes with investing in struggling producers.

If you are a long-term bull on the oil sector, but you don’t want to be worried about violent swings in stock prices, Suncor is a name you can simply buy and forget about for a couple of decades, and receive a nice 3% yield along the way.

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 Andrew Walker has no position in any stocks mentioned.

More on Energy Stocks

Arrowings ascending on a chalkboard
Energy Stocks

Beat the TSX With This Cash-Gushing Dividend Stock

Canadian Natural Resources stock is well set up to beat the TSX as it continues to generate strong cash flows…

Read more »

energy industry
Energy Stocks

2 TSX Energy Stocks to Buy Hand Over Fist Now

These two rallying TSX energy stocks can continue delivering robust returns to investors in the long term.

Read more »

green energy
Energy Stocks

1 Magnificent TSX Dividend Stock Down 37% to Buy and Hold Forever

This dividend stock has fallen significantly from poor results, but zoom in and there are some major improvements happening.

Read more »

oil tank at night
Energy Stocks

3 Energy Stocks Already Worth Your While

Here's why blue-chip TSX energy stocks such as Enbridge should be part of your equity portfolio in 2024.

Read more »

Solar panels and windmills
Energy Stocks

1 Beaten-Down Stock That Could Be the Best Bet in the TSX

This renewable energy stock could be one of the best buys you make this year, as the company starts to…

Read more »

Dice engraved with the words buy and sell
Energy Stocks

Is Enbridge Stock a Buy, Sell, or Hold?

Here's why Enbridge (TSX:ENB) remains a top dividend stock long-term investors may want to consider, despite current risks.

Read more »

Gas pipelines
Energy Stocks

If You Had Invested $5,000 in Enbridge Stock in 2018, This Is How Much You Would Have Today

Enbridge's high dividend yield hasn't made up for its dismal total returns.

Read more »

Bad apple with good apples
Energy Stocks

Avoid at All Costs: This Stock Is Portfolio Poison

A mid-cap stock commits to return more to shareholders, but some investors remember the suspension of dividends a few years…

Read more »