Suncor (TSX:SU) Stock Dips Below $23: Should You Buy?

Suncor’s high valuation and uncertain economic outlook play spoilsport.

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The demand-supply imbalance and lower economic activity led to a significant decline in crude oil prices, in turn, Suncor Energy (TSX:SU)(NYSE:SU) stock. However, the reopening of the economy and production cut is lending support to the crude oil prices, which should limit the downside in Suncor stock.

Investors should note that shares of Suncor Energy have once again fallen below $23 as rising coronavirus cases continue to play spoilsport. Its stock is down about 46% year to date. Besides, it is trading about 49% lower than its 52-week high of $45.12.

The steep decline in its value and an increase in economic activity raises the question of whether Suncor stock is a buy right now.

Are prospects improving for Suncor?

The supply glut and demand erosion led OPEC+ nations to announce a curb on production to support oil prices. In April, OPEC+ countries agreed to lower output by 9.7 million barrels per day. Moreover, in June, they further agreed to extend the production cut till July end.

Curbs on production helped crude oil prices to more than double from its lows. Meanwhile, the reopening of the economy should help in setting a balance between demand and supply. The West Texas Intermediate (WTI) crude continues to hover around US$40 despite rising coronavirus cases in the U.S., Brazil, and India.

WTI prices settling near US$40 per barrel is a good sign for Suncor. Remember, during the last quarter’s conference call, the company said that it would be able to cover all of its operating and administrative costs, planned capex, and dividends at a WTI price of US$35 per barrel.

Now what? 

Multiple factors are acting in favour of Suncor stock. The gradual increase in economic activity and high demand from China should support crude prices. Meanwhile, the company’s integrated business model mitigates some of the risks associated with the volatility in the prices.

Suncor has drastically reduced its capex guidance and remains on track to cut operating costs by over 10% in 2020, which should support its earnings. Meanwhile, its mix shift toward higher-priced light crude and higher value distillate support margins. The company has sufficient liquidity with no debt maturities in 2020, which should help in navigating the current crisis.

While things are improving for Suncor, its valuation fails to impress. It is trading at the next 12-month EV-to-EBITDA ratio of 8.3, which is well above the industry average of 2.5. Also, its next 12-month price-to-cash flow ratio of 6.2 is roughly double than the industry average.

Bottom line

Suncor has managed to lower its breakeven price through prudent cost control measures. Besides, the reopening of the economy is lending support to oil prices. However, Suncor stock still doesn’t attract me due to its recent dividend cut and high valuation.

Meanwhile, too much uncertainty and lack of coordination among OPEC+ nations could delay the pace of recovery in Suncor stock.

Investors with a long-term investment horizon could consider buying Suncor stock at the current price levels. However, there are better investment opportunities in the energy sector that offer high-yield and growth in the long run.

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 Sneha Nahata has no position in any of the stocks mentioned.

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