Suncor Energy (TSX:SU)(NYSE:SU) stock has been one of the market’s biggest losers in 2020. Down 63% year to date, it has fallen far more than the TSX Index.
Despite that, many remain optimistic about Suncor stock. Warren Buffett, as of his last filing, was buying more of it. And according to Fintel.io, there’s no shortage of institutions loading up on SU.
It’s not surprising that many investors are interested in Suncor. Trading for less than its tangible book value, it certainly looks like a bargain. But there’s still one big risk factors that investors need to be aware of when it comes to Suncor. This “risk” has already materialized once this year, causing massive losses for the company. And it could re-emerge again.
So, what is this risk factor, and why is it so bad for Suncor?
Widespread lockdowns
A nationwide lockdown is an ever-present but dormant possibility that could seriously challenge Suncor’s business. As an integrated energy company, Suncor makes money not only by extracting oil, but also by selling to consumers at the pumps. That business model comes under threat in the event of a nationwide lockdown. In the early months of the COVID-19 pandemic, the lockdowns tanked demand for gasoline. As a result, prices fell and companies like Suncor lost money. If another lockdown arises, then Suncor could be in trouble.
How much SU lost in the first lockdown
So far in 2020, Suncor Energy has lost billions of dollars. When we dig into the company’s quarterly reports, it becomes apparent that most of that was lost during the initial lockdowns.
In the first quarter, Suncor had an operating loss of $309 million and a net loss of $3.5 billion. In the second quarter, it had an operating loss of $1.4 billion and a net loss of $614 million. In the third quarter, it had a net loss of $12 million and an operating loss of $302 million. Both the net and operating losses were worse in the first and second quarters, which coincided with the nationwide lockdowns — than in the third.
This is consistent with the theory that tanking demand for gasoline during the lockdowns hit Suncor in the pocketbooks. Funds from operations were also higher in the third quarter than in the first or second, which provides additional support for that theory. Finally, Suncor’s first-quarter press release cites “improving demand for gasoline and diesel” as an assumption in its growth forecasts.
All of this together suggests that Suncor needs strong gasoline and diesel prices to make money.
To be sure, the company is operationally diversified, and does more than just sell gasoline at the pumps. It also sells crude oil wholesale and is involved in LNG marketing. But selling gas at Petro-Canada is a huge part of Suncor’s business, and it remains vulnerable to adverse swings in gasoline prices. So, in the event that the Federal Government brings in another nationwide lockdown, Suncor is in trouble.
